As the world awaits the announcement of the German constitutional court regarding the legality of the ESM mechanism, on this side of the Atlantic the focus remains squarely on the Fed as its holds it monthly FOMC meeting which concludes on Thursday. The latest unemployment data which printed a tepid 96K new jobs versus 150K expected has convinced many market participants that the Fed may be ready to institute another round of quantitative easing, but we remain unconvinced for several reasons.

Its Just Not That Bad

Although the latest employment data was a disappointment to the market it nevertheless printed positive for the 30th consecutive month. Some analysts have also pointed out that on a non-seasonally adjusted basis the employment actually rose by 252K and that the adjustment by the BLS may have to revised upward in the coming months. Certainly a figure closer to 200K would be more in alignment with the latest ADP figures and the with the near 4 point bump in the employment sub-component of the ISM services report which tends to be a good barometer of employment activity in the US. Regardless of how you slice the data, the underlying trend in the US economy offers no evidence of an imminent threat of a recession. Although ISM Manufacturing has dipped just below the 50 boom/bust line, ISM Services remains well above it and with 70% of the US economy composed of services the data suggests that growth will continue to to muddle on through at 1.5% annual GDP rate. That hardly impressive but not bad enough to trigger yet monetary stimulus.

Political Risk

Although Fed ostensibly is apolitical and fully independent and can act on its own volition any time it sees fit, it has never changed monetary policy after Labor day on during a Presidential election year. With US election extremely close any move by the Fed will be viewed through highly partisan prism and may create more harm than good as it creates a swirl of controversy. With Fed officials already under fire from the right side of the electorate the outcry will no doubt be fierce if the Fed proposes a major shift in monetary policy so close ahead of the election.


One of the key dampening factors in recent US economic growth has been what some analysts have called the “oil choke collar”. With US gasoline prices approaching the $4/gallon level, the US consumer is feeling increasingly squeezed as more of his non-discretionary spending has been allocated to energy costs. Another round of QE would only serve to further inflate commodity prices as excess liquidity spills over into the risk trade. If WTI moves through the $100/bbl handle pushing gasoline above the $4/gallon mark across much of the nation, the chill in consumer spending especially ahead of the key Christmas season may have the unintended impact of slowing rather than accelerating US growth.

USDJPY at Key Support

With QE3 fears on the rise, USDJPY has been negatively affected in the aftermath of the lackluster NFPs as the pair has slipped towards its long term support near the 78.00 level. If the Fed does push for further monetary stimulus, the pair may trade down to 77.50 but at those levels would likely invite intervention from the BOJ. The strength of the yen has been a major headwind for the Japanese economy as today’s disappointing GDP figures show and policymakers are unlikely to tolerate further appreciation for much longer. On the other hand, if the Fed remains stationary the pair could see a burst higher through the 79.00 figure and possibly a run towards psychologically key 80.00 handle as the risk of QE3 is lifted.

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