Democrats take the House, amazing jobs report from New Zealand

Summary:

• Republicans lose a majority in the House but they keep control over the Senate

• US dollar suffers, the bond market higher in anticipation of less expansionary fiscal policy

• Amazing labour market report from the NZ economy does not change outlook for monetary policy there

In line with polls conducted over recent weeks Democrats managed to take control over the House of Representatives in the midterm elections whereas Republicans kept a majority in the Senate. Having 395 out of 435 seats in the House already assigned one may notice that Democrats have gained 207 seats compared to 188 in the hands of Republicans. In case of the Senate the Republican Party have 51 seats while the Democratic Party 42 seats, 5 seats have yet to be assigned.

Democrats take control over the House while Republicans will keep a majority in the Senate. Source: The Guardian

All in all, the results we have known so far have been consistent with expectations with a slight possible deviation in the House - a possible larger than forecast advantage of Democrats. The divided Congress will mean less expansionary fiscal policy but it will not happen suddenly. Admittedly, there is unlikely that the new Congress will be able to implement further tax cuts promised by Donald Trump, it is also unlikely that these tax reductions already in place will be revoked before long (they could not be extended in the future though). The US dollar is falling this morning in response to the elections’ fallout losing against all major currencies (minor gains are seen against CAD and AUD). The bond market has gained momentum at the same time with the 10Y yield declining from almost 3.25% to slightly below 3.19% at the time of writing. This could be a clear sign that market participants less expansionary fiscal policy ahead. While both FX and bond market have seen larger moves it has not been the case for the stock market. The SP500 futures are trading flat after ending the yesterday's session with a 0.6% gain.

The EURUSD could be en route to 1.18 after rebounding from its crucial support line at 1.13. Some difficulties might be experienced nearby 1.1550 too as it seems to be the important technical level. Source: xStation5

While the US midterms drew attention overnight the NZ employment report for the third quarter did the same a bit earlier. The release published yesterday evening showed an array of astonishing numbers from the country’s labour market. First of all, the unemployment rate declined to 3.9% (SA) from 4.4% (revised down from 4.5%) while the labour force participation rate climbed at the same time reaching 71.1%, up from 70.9% while no changes had been expected. Employment growth totalled 2.8% in annual terms producing a big beat compared to the consensus of 2%. The better results are a result of both a lower number of unemployed and a higher number of employed. The first group plunged by 10.5% compared to the prior quarter while the latter group grew by 1.1%. At the same time a number of working-age-population increased 0.4%. A 0.7% drop (to 11.3%) in the underutilisation rate is also worth noting. The report suggests that a demand for work during the three months through September was so robust that even an increase in workforce was unable to push the unemployment rate higher. On the wage front average hourly earnings increased 1.4% in quarterly terms beating the median estimate of a 0.8% rise (both private and public wages grew 0.5%).

Employment moved up while unemployment declined massively in the third quarter. Source: Macrobond, XTB Research

Does this report mean the change for monetary policy in New Zealand? We do not think so. One needs to take into account that the NZ labour market is relatively small hence huge deviations either up or down are not unusual (we were offered similar spikes in the past). Secondly, while average hourly earnings increased more than expected last quarter the same was not seen in labour costs. Therefore, while this release could offer relief to the NZ dollar in the short-term, it seems to be not enough to convince the RBNZ to alter its rhetoric. Based on the market-implied probability of rate changes in New Zealand one may notice that chances for rate cuts for the next year have been pared almost altogether but chances for any rate hikes still equal zero. The RBNZ meeting will take place this evening hence we could be offered a bunch of remarks regarding the jobs report.

The NZDUSD spiked on Tuesday in response to the firm labour market report. However, the pair could struggle in the vicinity of 0.6820 where a huge resistance zone might be identified. Source: xStation5

In the other news:

• Japanese real cash earnings declined 0.4% YoY in September missing the consensus of a 0.3% YoY drop

• New Zealand 2Y inflation expectations for the fourth quarter ticked down to 2.03% from 2.04%

• German industrial production rose 0.8% YoY in September, the prior reading was revised up to 0.2% from -0.1%

• Australian construction PMI fell in October to 46.4 from 49.3