| USA Overall, the messaging from the Federal Reserve was positive. Chair Powell stated that the committee was pleased by the progress made thus far on returning inflation to their 2% target, but noted that they would require more time to assess the sustainability of current disinflation trends. With economic growth accelerating last year on the back of strong consumption growth, the labor market remaining solid, and geopolitical tensions posing challenges to supply chains (and hence inflation), caution is likely wise. Chair Powell also stated that he viewed it as unlikely that the FOMC would possess the confidence to reduce interest rates by the March meeting in six weeks’ time. Powell’s caution was further validated when we received the January employment data on Friday. Not only there were 353k jobs added in the first month of the year, but last year’s total job gains were also revised up to 3.1 million, well above the prior reading for 2.7 million, with much of the revised strength coming through the second half of the year. Furthermore, wage growth appears to be accelerating, with the three-month annualized change in average hourly wages rising to a twenty-month high in January. Although near-term strength in the labor market is expected to recede over the coming months, sustained imbalances in the labor market is a risk that the Fed is acutely aware of Nonfarm payrolls rose 353K in January, a lot more than the median economist forecast calling for a +185K print. This positive surprise was compounded by a +126K cumulative revision to the previous months’ data. Employment in the goods sector advanced 28K as gains in both manufacturing (+23K) and construction (+11K) were only partially offset by a 6K decline in mining/logging. Jobs in services-producing industries, for their part, expanded no less than 289K, with notable increases for health/social assistance (+100K), professional/business services (+74K), retail trade (+45K), information (+15K) and leisure/hospitality (+11K). The temporary help services category, meanwhile, saw payrolls increase 4K, marking the first gain in 11 months for this indicator. In total, 317K jobs were created in the private sector, compared with 36K in the public sector, the latter split between federal (+11K) and state/local administration (+25K). Average hourly earnings rose 4.5% y/y in January, up from 4.3% the prior month and four ticks above consensus expectations. Month on month, earnings progressed 0.6%, the most in nearly two years Non-farm payroll data came in significantly above consensus expectations in January and the surprise could have been even bigger had it not been for poor weather conditions which likely weighed on hiring during the month and forced 553K people to miss work, a figure well above the average for a month of January (392k). Adding to the good news, the prior months’ results were revised upward a cumulative 126K. Nearly every detail in the establishment survey were positive. The private sector saw the big-gest increase in payrolls in a year, with gains broad-based across segments. More specifically, construction and manufacturing mustered some healthy gains, a good sign considering that these two sectors tend to react more quickly to the ups and downs of the economic cycle. Even employment in temporary help services which is a good leading indicator of employment as a whole recorded a small increase, putting an end to a streak of 10 consecutive declines in this segment. The only real disappointment was a drop in average weekly hours worked and a corollary de-cline in aggregate hours worked during the month The Job Openings and Labor Turnover Survey (JOLTS) showed that the number of positions waiting to be filled increased from 8,925K in November (initially estimated at 8,790K) to 9,026K in December. With the number of people looking for a job remaining steady, the ratio of job offers to unemployed persons stayed at 1.4, its lowest point since September 2021 but still well above this indicator’s pre-pandemic level (-1.25). The monthly increase in job offers was led by professional and business services (+239K), health and education services (+73K), and retail (+50K). Alterna-tively, job postings decreased in leisure and hospitality (-131K), accommodation and food services (-121K), and trade, transport, and utilities (-67K). The quit rate (number of voluntary separations as a percentage of total employment) held steady at 2.2%, a tick below its pre-pandemic level (February 2020). However, the quit rate in the private sector slipped from 2.5% to 2.4% and was now below its pre-pandemic level Construction spending advanced 0.9% in December after progressing an upwardly revised 0.9% the prior month (initially estimated at +0.4%). The monthly gain reflected increases in both the private sector (+0.7%) and the public sector (+1.3%). In the former, spending on residential projects jumped 1.4%, while outlays on non-residential structures were down 0.2% The S&P CoreLogic Case-Shiller 20-City Home Price Index rose 0.15% MoM in November to an all-time high. This was the indicator’s tenth consecutive monthly advance, though the pace had been slowing since May and the gain was much smaller than expected by the median economist forecast (+0.5%). Prices were up in 14 of the markets covered, led by Las Vegas (+0.97%), Cleveland (+0.91%), Miami (+0.72%), and Charlotte (+0.70%). Year on year, prices rose 5.4% at the national level, a fifth consecutive progression The ISM Manufacturing PMI rose from 47.1 in December to 49.1 in January, overshooting the 47.2 print expected by consensus. The index remained slightly below the 50-point mark separating expansion from contraction for the 15th month in a row, its longest such streak in more than two decades index remained slightly below the 50-point mark separating expansion from contraction for the 15th month in a row, its longest such streak in more than two decades Output (from 49.9 to 50.4) shot back up into expansion territory in January, as did new orders (from 47.0 to 52.7), which had declined over the previous 16 months. Such a long series had not been observed since 1982. Weak demand conditions allowed factories to keep clearing backlogs at a slightly faster pace (from 45.3 to 44.7). This encouraged firms to reduce payrolls for the fourth month in a row and at a slightly stronger pace (from 47.5 to 47.1). Signs of supply chain improvements remained visible in the report as the gauge measuring supplier delivery times (from 47.0 to 49.1) stayed below 50. On the other hand, the sub-index gauging prices paid shot back up into expansion territory (from 45.2 to 52.9) in January for the first time since April 2023 The Conference Board Consumer Confidence Index rose from 108.0 in December to 114.8 in January. This remained below the series’ pre-pandemic level but was in line with the consensus fore-cast. Consumer assessment of the current situation improved, springing from 147.2 to 161.3. The share of respondents that deemed jobs plentiful at present jumped from 40.4% to 45.5% while the pro-portion that deemed current business conditions good increased from 21.1% to 22.5%. The sub-index tracking longer-term expectations improved as well, from 81.9 to 83.8, which was still short of the series’ long-run average. This improvement occurred on the back of a lower share of respondents that had a negative opinion of future business conditions (from 17.8% to 16.0%), employment (from 18.4% to 15.3%), and income (from 13.6% to 11.5%). Proportionally less respondents planned to buy a home (from 5.3% to 4.7%), a car (from 11.9% to 10.0%), or major appliances (from 45.1% to 42.5%) in January. Finally, consumer inflation was expected to stand at 5.2% for the next 12 months, down three ticks from the prior month and the lowest level since March 2020 A sharp drop in the share price of New York Community Bancorp, after the company slashed its dividend and increased loan loss reserves, prompted a broad decline in US regional bank shares late this week as the sector’s exposure to the troubled commercial real estate sector burst back into the spotlight. CRE concerns were not limited to the United States, however, as two foreign banks, Japan’s Aozora Bank and Germany’s Deutsche Bank, each raised loan loss reserves due to US commercial real estate loans. Real estate analytics firm Trepp reports that banks face about $560 billion in commercial mortgage loan maturities by the end of 2025 The major indexes ended the week mixed amid a slew of significant earnings reports and economic data. The S&P 500 Index and Dow Jones Industrial Average moved to intraday highs, but the small-cap indexes recorded losses. The advance was also narrow, with an equally weighted version of the S&P 500 Index recording a modest loss. The week closed out the month of January with the S&P 500 advancing 1.6% over the month, while the equal-weight S&P 500 fell 0.90%, and the small-cap Russell 2000 Index declined nearly 4.0%. It was the busiest week of the fourth-quarter earnings reporting season, with several releases from heavily weighted tech giants driving movements in the major benchmarks. The S&P 500 and Nasdaq Composite Index fell sharply on Wednesday, following lower-than-anticipated earnings guidance from Microsoft, Google parent Alphabet, and chipmaker Advanced Micro Devices. The benchmarks recovered much of their losses on Thursday, however, following upside earnings surprises from Amazon.com, Facebook parent Meta Platforms, and Apple In terms of data release, the ISM Services index is out on Monday. The ISM services index declined two points to 50.5 in December, which brought the index to its lowest level of 2023. The main driver of the decline was a precipitous 7.4-point plunge in the employment component, bringing it to 43.3, or the lowest level outside the pandemic since 2009. Friday’s employment report revealed payrolls in the private service-providing sector rose 289K in January, indicating the employment component of the ISM services index is in prime position to bounce back next week Trade balance is out on Wednesday. The international trade balance narrowed modestly in November, driven by a larger drop in imports than exports. International trade flows were generally weak in November due to the goods sector specifically. Both goods imports and exports declined on the month, falling 2.3% and 3.2%, respectively. Consumers goods imports and exports were particularly weak. Looking ahead to December, the advance goods trade balance data released last week showed the merchandise goods trade balance narrowed $0.9B in December. Goods exports jumped 2.5% ($4.1B) on the month to $169.8B on a seasonally-adjusted basis, driven by a large increase in industrial goods exports that partially offset last month’s decline in that category. Imports of goods rose a more tepid 1.3% ($3.2B) to $258.3B, driven by an increase in consumer goods specifically, also partially offsetting the previous month’s declines. UK February’s Bank of England (BoE) interest rate decision is split three ways: six members backed a freeze in rates, while two opted for an increase of 25bps and one for a cut of 25bp. This was a somewhat more hawkish result than was expected by markets. The majority of MPC members judged that even though services inflation and wage growth had fallen more than expected, there were enough indicators of persistent inflation to warrant a hold in rates. The two backing an increase argued that embedded inflation persistence remained a risk and justified a more hawkish position, while one member backing a cut to rates claimed that lags in the transmission of monetary policy require Bank rate to become less restrictive. The BoE is now expecting CPI to fall to target of 2% in Q2 2024, although it projects that this will increase again in Q3 and Q4 owing to base effects in the energy component of inflation. While the inflation picture is more sanguine compared to the November forecast for early to mid-2024, CPI is expected to remain above the 2% target in two years’ time due to the persistence of domestic inflationary pressures, if market expectations for interest rates are followed. It is also notable that the CPI projection is skewed to the upside over the next six months owing to geopolitical factors. Growth prospects for the UK remain muted in the short term, according to the latest BoE inflation report, with four-quarter growth in Q1 2025, expected to be 0.5% and Q1 2026 expected to be 0.8% Net approvals for house purchases stayed fairly flat in December, rising only marginally from 49,300 in November to 50,500 in December. This is slightly lower than market expectations for December of 53,000. December’s print means that mortgage approvals remain around one quarter below the 2015-19 average. The continued depressed levels of mortgage approvals may indicate that UK house prices still face further corrections in prices, although the fall in swaps rates since mid-2023 is being reflected in mortgage rates and should mean a pick-up in mortgage approvals in 2024. The effective interest rate paid on newly drawn mortgages fell in December 2023, which is the first drop since November 2021. Household deposits in December registered at levels that were fairly typical pre-pandemic. Households deposited, on net, GBP 5.4bn with banks and building societies. N&I net deposit flows increased to GBP 0.6bn in December, up from GBP 0.4bn in November. This means collective deposits grew by GBP 6bn in December, more than the average monthly rate over the past six months but less than the GBP 7.4bn in October. Net consumer credit was GBP 1.2bn in December, down from GBP 2.1bn in November and GBP 0.3bn below market expectations. It is notable that this coincides with disappointing retail sales figures for December, which came in markedly below expectations. Note, however, that some of this has been attributed to consumers bringing forward much of their spending to take advantage of discounted goods in November and, as a result, the figures probably do not indicate any broader trend The Bank of England (BoE) held its key interest rate steady at an almost 16-year high of 5.25% but appeared to signal that it would consider lowering it for the first time since consumer price inflation accelerated after the coronavirus pandemic. The BoE dropped its warning that rates could rise again, saying they would now be “kept under review.” EU Eurozone headline inflation eased to 2.8 percent in January from 2.9 percent in December. Core inflation also eased by 0.1pp to 3.3 percent. Both headline and core inflation were 0.1pp higher than Bloomberg expectations. The ease in core inflation was supported by lower price increases in goods at 2.0 percent, down from 2.5 percent in December, while service price inflation was unchanged at 4 percent. Energy prices fell by 6.3 percent (-6.7 percent in December) over the past year, while food inflation is still elevated at 5.7 percent (6.1 percent in December). German headline inflation fell to 3.1 percent in January, down from a temporary peak at 3.8 percent in December (2.3 percent in November) and marginally below expectations at 3.2 percent. In France, headline inflation eased to 3.4 percent from 4.1 percent, again below expectations of 3.6 percent. Italian headline inflation increased marginally more than expected, but remains low at 0.9 percent, up from 0.5 in December. Lastly, Spanish headline inflation unexpectedly rose to 3.5 percent from 3.3 percent in December, in contrast to an expected decline to 3.0 percent. European Central Bank President Christine Lagarde said this week that the central bank’s governing council in unanimous in the view that its next move will be to cut rates, though she said more data is needed as “we’re not there yet” on inflation. Wage data will be particularly important in the ECB’s calculus, she said. It was reported this week that eurozone unemployment held steady at a record-low 6.4% in November In local currency terms, the pan-European STOXX Europe 600 Index ended the week roughly flat. Major stock indexes were mainly softer. France’s CAC 40 Index fell 0.55%, Germany’s DAX lost 0.25%; the Italy’s FTSE MIB, on the other hand, gained 1.11%. CHINA The value of new home sales by the country’s top 100 developers fell 34.2% in January from the prior-year period, roughly even with the 34.6% drop in December, according to the China Real Estate Information Corp. The report showed no sign of a turnaround in China’s property crisis as falling home prices and construction delays have kept buyers on the sidelines, which in turn has increased pressure on indebted property developers and led Beijing to roll out intervention efforts to prop up the sector The Caixin Manufacturing PMI for China held steady at 50.8 in January, marking the fifth, albeit very modest, improvement in operating conditions in six months. The report also signaled sustained expansion in output and new orders. However, new orders did lose some momentum from December despite an increase in new exports. This slight improvement in market conditions was partially reflected in employment, as the rate of job shedding de-creased to its lowest level in five months. Inflationary pressures, meanwhile, remained subdued as input prices continued to rise at a pace below the series long-term average. Finally, year-ahead confidence levels remained above the 50 mark in January and were at their highest in nine months A Hong Kong court ordered China Evergrande, formerly the country’s largest property developer, to be liquidated after the company failed to reach a restructuring agreement with its creditors since it defaulted on its offshore bonds in December 2021. The focus now shifts to whether the ruling will be followed in mainland China, which has a separate legal system and where most of Evergrande’s assets reside. Analysts are also concerned that the order to wind up Evergrande, which has as much as USD 327 billion in debt according to some estimates, could undermine China’s financial system and further weaken confidence in the housing industry Stocks in China retreated as downbeat economic data and property sector headlines fueled investors’ pessimism about the growth outlook. The Shanghai Composite Index fell 6.19%, its worst week since 2018, while the blue-chip CSI 300 sank 4.63%, its biggest weekly loss since 2022, according to Bloomberg. Both benchmarks are trading at five-year lows. In Hong Kong, the benchmark Hang Seng Index gave up 2.62%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, M. Cassar Derjavets. |
