After the summer lull in trading activity and volatility, markets are highly reactive to the multitude of driving factors that have been impacting in reent weeks. The latest factor is the Italian referendum creating volatility on the euro which is even before a highly anticipated ECB meeting this week. However the markets will also be looking at the longevity of the dollar bull run which has begun to look somewhat tired in recent days. A dollar correction would impact across markets.
The Non-farm Payrolls report will do nothing to change the fact that the Fed will hike rates on 14th December. However earnings growth continues to disappoint and although U6 unemployment data (a broad measure including unemployed, underemployed and discouraged) continues to fall it is still c.1% above pre-crisis levels of 2007/8. The labor market slack and weak earnings growth leaves room for the doves on the FOMC to stand their ground. The Fed leans dovish and is historically cautious but this could help to flatten the path of rate hikes in 2017 that has steepened in the wake of Trump’s promises of fiscal expansion. However, focus now switches away from the US back towards Europe. Reaction to the Italian referendum has been reasonably muted but Renzi’s defeat is another step on the populist road. Italy will not be the country that breaks the Eurozone, but its banks are badly in need of a restructured political and economic system to drive growth. Also the rise of populist voting continues to gather pace and attention will turn to the Netherlands (March elections) and the all important French Presidential elections in April/May. Although the Eurozone has been showing gradual signs of improvement, the ECB is likely to extend its QE program this week. Core inflation is stubbornly low at +0.8% and growth is tepid and the program currently ends in March. A extension to December is expected but will the ECB increase purchases and change the composition?