More evidence emerged today that the 0.1 percent contraction measured in the fourth quarter of 2012 was indeed due to the biggest reduction in defense spending since 1972. Nonfarm payrolls, the so-called monthly jobs report, came in this morning at 157,000, slightly above the 155,000 median estimate by analysts. Steep defense cuts had caused military spending to fall by 22 percent quarter on quarter, a fiscal adjustment which appears to help explain the sudden halt to economic growth in the fourth quarter. Consumer spending rose 2.2 percent in the fourth quarter, compared to 1.6 percent in Q3, while business investment also saw a modest uptick. The effect of the expiration of the temporary payroll tax cut at the beginning of this year, along with whatever further cuts agreed on by the White House and Congress to avoid the secuester, remain as the biggest macro-economic risks in short to medium term. However, a temporary moderation of growth after a fiscal tightening is hardly a shocking economic result.
As such, markets have largely shrugged off the headline Q4 contraction in light of the strong data coming out of the private sector. Today's jobs number, coming in as expected, further calmed markets. MXN is up, settling into a tight range around 12.64 after USD/MXN kissed 12.75 overnight in Asia. The Canadian dollar has also fought its way back above parity with its US counterpart, with USD/CAD trading in a 0.9980 to 1.0000 range.
The Euro continues its incredible run, with one Euro purchasing 1.3669 USD as of 6:06 PM GMT. Conversely, a fresh wave of Yen weakness has USD/JPY poised to test the 93 level. The pair has tested fresh highs today, touching nearly 92.7 before retreating back towards 92.5. USD/JPY began this week at 90.8. In sum, the continuation of the major trends seen since last fall confirms that markets remain confident despite the recent GDP hiccup.
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