A tale of two shocks

Bill de Blasio, New York's recently elected mayor, won using the Dickensian slogan "a tale of two cities", but in the markets this week it was more a tale of two shocks.

Today's US non-farm payrolls report was expected to show about 120,000 jobs created in October. Instead, 204,000 jobs were added over the month, and revisions to prior months created another 60,000. The government shutdown clearly had less of an impact on the labour market than many thought.

The jobs report came on the back of an even bigger surprise yesterday, when the ECB cut its refinancing rate 25bps to 0.25%. The central bank was expected to loosen policy in the coming months but not as soon as November. Mario Draghi was patently influenced by the falling inflation rate, which now stands at 0.7%. Deflation is not typically a concern of the Teutonic ECB, but Draghi has broken free of the hawkish example set by his processor Jean-Claude Trichet and takes a more aggressive approach.

The net result of the two shocks? A market little changed from where it started the week. The Markit iTraxx Europe was trading at 83bps on Friday afternoon, while the Markit CDX.NA.IG was quoted at 75bps. - both indices marginally tighter than last Friday's close.

To an extent the two developments offset each other. The ECB's rate cut was obviously positive for risk assets, and the market duly rallied on Thursday. The effect of the bumper jobs report was more ambiguous. In normal times, a stronger labour market boosts risk assets - the US economy is dependent on consumption and more people in work means more spending.

But these aren't normal times, and economic data has to be viewed through the prism of unconventional monetary policy. The pace of the Federal Reserve's asset purchases depends on labour market conditions, so better than expected jobs numbers may bring the start date of QE tapering forward. Hence spreads widened after the NFP was released.

However, both Thursday's rally and Friday's sell-off lost momentum, and the spread movements ended up being mundane. Enthusiasm for the ECB's rate cut was tempered with disappointment from the lack of a new long-term refinancing operation, and it will probably take more than a month's worth of decent jobs figures to change tapering expectations. Nonetheless, this week underlined how beholden the markets are to central banks, and this is unlikely to change any time soon.

Earnings were secondary in this macro climate, but there were some single name developments of note. Telecom Italia's spreads widened 20bps to 300bps today after it announced a new strategic plan. The company aims to increase its financial flexibility by raising €4bn through a mandatory convertible bond and several asset sales. The end result - lower leverage - is positive for the balance sheet but credit investors were disappointed that no rights issue was announced and TIM Brazil is to remain part of the group.

Next week will see China come back into focus with several important data releases and the third plenum. The latter may produce some headline grabbing policy initiatives but probably won't trigger a decisive shift in spread direction.

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