Weekly Macro Snapshot:Fed likely to hike rates despite rising political uncertainties in Europe

Satisfactory labor report supports a Dec hike The US released an acceptable labor report last Friday. Non-farm payrolls increased by 178k in Nov, close to market expectation of 175k, and equivalent to the annual average pace. Unemployment dropped unexpectedly to 4.6%, the lowest level in nine years. The sharp fall in the jobless rate was partly a result of the improvement in the labor market, but was also due to more people dropping out of the workforce. The labor participation rate ticked down to 62.7%, a near 38-year low. Wages were also a little disappointing, with average hourly earnings falling 0.1% MoM in Nov, and annual growth dropping from 2.8% in Oct to 2.5% in Nov. Overall, it was not a perfect labor report, but was enough to confirm that the US labor market remains on the right track. We are therefore confident that the Fed will announce a rate hike at the Dec 12-13 meeting. Italy’s referendum result to lead to an early election, but the risk is controllable Early results of Italy’s referendum held yesterday suggest voters have rejected the proposed constitutional reform. Undoubtedly, the result will be unfavorable for the markets. Prime Minister Matteo Renzi is set to resign, meaning an early election and political uncertainties that may be a cause for concern for investors. However, we believe downside risks should be limited and controllable. First, Five-Star Movement, the largest opposition party, now has support of around 30%, not enough to form a government to lead to a euro exit. Second, the early election will not be held before mid-2017, so euro exit fears should not be the key concern in the short term. Third, the market should have expected the referendum result since the polls clearly showed that “No” would win. Fourth, the ECB will hold a policy meeting this Thursday, and President Draghi is expected to be dovish in order to maintain market confidence. Risk of a European debt crisis should therefore be manageable in the short term, in our view. China’s economic rebound continues in 4Q16, but is likely to slow in 2017 China’s NBS manufacturing PMI rose to a surprising 51.7 in Nov, the highest level in 28 months. The Caixin manufacturing PMI dropped slightly to 50.9, but still saw the fifth straight month above 50. The recovery in manufacturing was more broad-based in Oct and Nov, since we have seen some improvements at small and medium-sized companies. This is a good sign for the economy, so we believe GDP growth may rebound slightly in 4Q16. However, we do not expect the improvement in manufacturing PMI to continue in 2017. First, Donald Trump’s policies are not favorable for the global trade environment, especially for China. For example, he proposes tariffs with China which would hurt exporters’ profit. Second, the Chinese government has started to cool the housing market in 4Q16 in order to prevent a housing bubble, which will also have a negative impact on manufacturing activity. Third, we do not expect China’s government to introduce any fiscal and monetary stimulus measures in the first half of 2017, and believe the policy focus should remain on structural reform. Economic growth may therefore slow down again in 2017.