Economic Outlook – 5 February 2023

Nonfarm payrolls surged 517K in January, the most in 6 months and nearly three times as much as the +188K print expected by consensus. Adding to this positive surprise, the previous months’ data were revised upward a cumulative 71K. Note that historical establishment data have been revised in January as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Gains in the private sector re-accelerated to a 6-month high of 443K as employment in the goods sector sprang 46K while jobs in services-producing industries expanded a whopping 397K. Meanwhile, employment in the public sector jumped 74K, partially reflecting a return from a strike. Average hourly earnings rose 4.4% YoY in January, down from 4.8% the prior month and the least in 18 months (from 5.0% to 4.6% on a 3-month annualized basis). Month on month, earnings progressed a consensus-matching 0.3%. Aggregate hours worked (a good proxy of GDP growth) jumped to a new all-time high after having declined for 3 consecutive months between October and December. This was due in part to employment gains, but also to a rebound in average weekly hours worked (from 34.4 to a 10-month high of 34.7). Still in the positive column, the diffusion index jumped from 65.4% to 69.0%, which suggests job creation grew more broad-based. The less volatile 6-month diffusion index, on the other hand, continued to weaken, from 74.4% to a post-pandemic low of 72.4%. Temporary help jobs – a good leading indicator of overall employment – snapped a two-month losing streak, advancing 25.9K. What’s more, job creation in cyclical categories such as manufacturing and construction continued apace although it is questionable this good sequence can last much longer given the sharp slowdown observed in both of these sectors recently. Finally, benchmark revision meant that employment in March 2022 was 568K (or 0.3%) higher than previously estimated Fed delivered 25bp with press statement says more to come. The press statement included few changes to the December release. However, the Fed acknowledged that inflation has eased somewhat. There is no change in the forward guidance, which means that the Fed still sees “ongoing increases” in rates following decision. Fed Chairman Powell did not push back on the improvement in financials conditions, i.e. stronger equities and lower yields since the last meeting. In fact, Powell expressed that financial conditions hadn’t changed much since December. While the Fed chief repeated that the job is not yet done, he referred to a welcome disinflation trend over the last months. Asked on the divergence in market pricing and the Fed’s guidance, it was not a cause for worry. The market, according to Powell, expects a quicker decline in inflation than the Fed. If inflation would indeed come down at a faster pace, Powell says it would be “incorporated in our policy”. This is somewhat of a dovish, and surprising, shift from previous warnings to reverse tightening too soon The Employment Cost Index rose 1.0% in Q4 after climbing 1.2% in Q3. Benefits costs rose 0.8% while wages and salaries increased 1.0%. Year on year, the ECI equaled its record growth of 5.1% (up from 5.0% in Q3) According to the Job Openings and Labor Turnover Survey (JOLTS), the number of positions waiting to be filled jumped from 10,440K in November to 11,012K in December. The increase was the first in three months and flew in the face of consensus calling for a decrease to 10,300K. As a result, the ratio of job offers to unemployed person rose from 1.74 to 1.92, one of its highest levels on record. The monthly gain was led by leisure/hospitality (+430K), retail trade (+134K), and wholesale trade (+73K). Alternatively, job postings decreased in information (-107K) and manufacturing (-39K). Total separations went from 5,831K to 5,890K as an increase in layoffs (from 1,418K to 1,468K) was only partially offset by a decline in the number of people who quit their jobs voluntarily (from 4,102K to 4,087K). The quit rate (i.e., number of voluntary separations as a percentage of total employment) remained stable at 2.7%, which suggests that workers looking to change jobs remained confident about their prospects and that employers continued to face stiff competition for talent Initial jobless claims fell from 186K to a nine-month low of 183K in the week to January 28. Continued claims, for their part, edged down from 1,666K to 1,655K  Nonfarm business productivity rose 3.0% annualized in Q4 after increasing 1.4% in Q3. The change in Q4 was due to employee hours growing at a much slower pace than output (+0.5% annualized vs. +3.5%). The median economist forecast for Q4 was for productivity growth of 2.4%. YoY, productivity was down 1.5%, the second-steepest decline recorded since 1982 The ISM Non-Manufacturing PMI surged back in expansion in January, erasing all of December’s pullback (from 49.2 to 55.2). This development confirms that the December decline in the ISM index was exacerbated by poor weather conditions which caused numerous power outages and disrupted the travel plans of several households. Growth in business activity (from 53.5 to 60.4) accelerated while new orders jumped 15.2 points (from 45.2 to 60.4), their largest monthly change on record excluding the rebound from the pandemic. Both imports (from 52.7 to 53.0) and exports (from 47.7 to 59.0) were in expansion, and the backlog of orders in turn accelerated (from 51.5 to 52.9). The employment sub-index (from 49.4 to 50.0) and the supplier deliveries gauge (from 48.5 to 50) both signaled unchanged conditions. Of the 18 industries covered, 10 reported growth in January The ISM Manufacturing PMI slipped from 48.4 in December to 47.4 in January, marking a third straight contraction in factory activity. This is its lowest level since the early months of the pandemic. Output (from 48.6 to 48.0) shrank for a second consecutive month, while new orders (from 45.1 to a multi-year low of 42.5) fell further below the 50-point mark separating expansion from contraction. Despite weaker demand conditions, the employment gauge (from 50.8 to 50.6) was indicative of a slight expansion in payrolls The Conference Board Consumer Confidence Index slid from an 11-month high of 109.0 in December to 107.1 in January. The median economist forecast called for the index to stay at 109.0. This deterioration was driven by worse longer-term expectations while assessment of the current situation improved. The subindex tracking sentiment towards the next six months dropped from 83.4 to 77.8 as the proportion of respondents who expected job prospects to improve decreased from 20.0% to 17.9%, the proportion of those who expected better business conditions went from 20.9% to 18.6%, and the proportion of those who expected to see their income increase over the next six months remained relatively stable, dipping from 17.3% to 17.2%. Buying plans for homes slipped during the month (from 6.6% to 6.3%), while they remained stable for major appliances (at 44.8%) and automobiles (at 11.0%) Construction spending sank 0.4% in December after increasing 0.5% in November. The consensus called for stability in the month. The drop was due to a 0.4% drawdown in both private and public spending. Lower private outlays reflected a decline in both the non-residential (-0.5%) and the residential segments (-0.3%, a seventh straight monthly decline). Relative to their pre-crisis levels, private outlays were still up 9.2% in the former segment and 41.1% in the latter. After outperforming during the pandemic, residential construction now seems to be running out of steam, which is not surprising given the significant rise in mortgage rates and the marked slowdown in the home resale market According to the S&P CoreLogic Case-Shiller 20-City Index, home prices fell a seasonally adjusted 0.56% in November, marking the fifth consecutive decline for this indicator. Of the 20 cities included in the index, 18 were down in the month. Declines were led by San Francisco (-1.39%), Phoenix (-1.37%), Las Vegas (-1.24%), and Seattle (-0.97%) US President Joe Biden and Speaker of the House of Representatives Kevin McCarthy met at the White House on Wednesday to discuss raising the nation’s debt limit. Republican lawmakers want an agreement to limit future spending in exchange for raising the limit while the White House contends that Congress should raise the ceiling without conditions. While no agreement was reached after Wednesday’s talks, McCarthy said he is optimistic that the two sides can reach common ground. The US Department of the Treasury estimates it can employ extraordinary measures through early June that will allow the government to meet its obligations Most of the major indexes extended their winning streaks into February, helped by some upside surprises in economic data and fourth-quarter earnings reports, as well as what some saw as encouraging signals from the Federal Reserve. The S&P 500 Index reached an intraday high of 4,195 on Thursday, its best level since late August. A 23% jump on Thursday in Facebook’s parent company, Meta Platforms—the stock’s biggest daily gain in almost a decade—provided a major boost to the technology-heavy Nasdaq Composite Index and other mega-cap technology and internet-related growth stocks. The social media giant beat revenue expectations for the fourth quarter, and CEO Mark Zuckerberg delivered an upbeat outlook for the year ahead. Some of the enthusiasm drained on Friday, however, following disappointing results and outlooks from Apple, Google’s parent company Alphabet, and The Trade Balance print is out on Tuesday. The U.S. trade deficit narrowed sharply in November as imports collapsed and exports continued to soften. Since the most recent monthly trade report, advance data on Q4 real GDP show net exports were additive to overall economic growth at the end of last year, boosting output by 0.6 percentage points. That said, the boost stemmed from real imports (-4.6%) declining more than real exports (-1.3%), which is hardly a sign of strength in trade flows The consumer credit is out on Wednesday. Consumers tapped sources of credit at incredible rates last year. Revolving credit, which is mostly composed of credit card debt, increased by $16.5B in November. The five biggest monthly increases in revolving credit in the past 20 years have occurred within the past 12 months. Non-revolving credit, which includes installment debt such as auto and student loans, increased a more modest $11.5B in November 

The Bank of England’s (BoE’s) Monetary Policy Committee has voted 7-2 to increase interest rates by 50bp. The two dissenting members backed no change. This now leaves Bank Rate at 4%. The majority of MPC members backed a 50bp increase on the basis that the labour market remains tight and domestic price and wage pressures have been stronger than expected, suggesting a greater persistence in domestic-led inflationary pressures. Two members preferred to leave Bank Rate unchanged at 3.5%, arguing that lags in the effects of monetary policy mean that sizeable impacts from past rate increases have yet to come through Energy prices, while remaining historically high, have moderated and this has led to the BoE revising down its projections for inflation: annual CPI inflation is expected to fall to around 4% towards the end of this year, compared to a projection of over 5% in the November 2022 report. A much shallower projected decline in GDP is also now being forecasted with, for example, GDP only expected to fall by 0.1% in Q1 2023. However, this more seemingly sanguine environment has been somewhat offset by UK domestic inflationary pressures being firmer than expected, especially private sector pay levels and services CPI inflation. For the period September to November 2022 annual private sector pay registered at 7.2%, a level which is far higher than what is consistent with the 2% inflation target. Moreover, public sector pay – currently rising by an average of just 3.3% over the same period – will likely face further upward pressures over the course of this year. This highlights that, while projections for CPI inflation have fallen, the UK’s inflation pathway remains highly uncertain  

Eurozone inflation in January grew below expectations to 8.5 percent y-o-y, compared to 9.2 percent the month before. Energy is expected to have the highest annual rate in January  (17.2 percent, compared with 25.5 percent in December), followed by food, alcohol & tobacco (14.1 percent, compared with 13.8 percent), non-energy industrial goods (6.9 percent, compared with 6.4 percent) and services (4.2 percent, compared with 4.4 percent). Meanwhile, core inflation was unchanged at 5.2 percent, above expectations.
The HICP releases in January (December) for major eurozone countries were as follows: France 7 percent (6.7), Italy 10.9 percent (12.3) and Spain 5.8 percent (5.5). Germany’s inflation release was delayed this month and Eurostat is reportedly using it’s own estimate of German inflation in January as the input into the region’s aggregate. The unemployment rate in the eurozone for December was slightly above expectations at 6.6 percent compared to 6.5 percent in November The January release is unusually noisy, with delays out of Germany, new HICP weights, and administrative- as well as menu price changes. Given the unusual uncertainty around the January flash estimate, the ECB is likely to put less weight on the headline estimate for now. Still, core inflation appears to remain high, both in terms of annual changes but also in terms of momentum. On a seasonally adjusted, three-month moving average, basis inflation is still remarkably high, both for non-energy goods and services. This will likely be the main focus for the ECB as it stands poised to raise its policy rates by 50bp at tomorrow’s monetary policy meeting The Governing Council (GC) decided to “stay the course” and raise the three key ECB interest rates by 50 basis points, and indicated that it also expects to raise them further. As stated, “in view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.” It further reiterated that “keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.” Similarly, it reiterated that “future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.” The GC also decided on the “modalities” for reducing its asset purchase program (APP). It reiterated that the APP portfolio will decline by EUR 15bn per month on average from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction will be determined over time Shares in Europe rose on hopes that central banks may be nearing the end of the most restrictive phase of this monetary tightening cycle. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.23% higher. Major stock indexes also advanced. Germany’s DAX Index added 2.15%, France’s CAC 40 Index gained 1.93%, and Italy’s FTSE MIB Index climbed 1.95%   

China’s official manufacturing Purchasing Managers’ Index (PMI) rose to 50.1 in January from December’s 47.0. This marked a return to growth for the first time since September as domestic activity improved after Beijing abandoned its coronavirus restrictions at year-end. The nonmanufacturing PMI rose to a better-than-expected 54.4 from 41.6, reaching its highest reading since June. Separately, the private Caixin/S&P Global survey of manufacturing activity in January remained below 50, the level separating growth from contraction, as output prices and new orders declined and exports retreated amid softening global demand. However, the Caixin/S&P Global survey of services activity rose to a better-than-expected 52.9 reading compared with 48.0 in December New home sales in China fell by 48.6% in January as weak demand weighed on buying activity, reported state-run media. The drop in sales comes even as many cities across the country have reportedly reduced mortgage rates for first-time homebuyers in advance of an expected rate cut by the central bank. In January, the People’s Bank of China announced that first-time buyers would be offered lower mortgage rates if new home prices fell for three consecutive months Chinese equities fell in the first full week of trading after the weeklong Lunar New Year holiday as investors pocketed gains from a recent rally and turned cautious about the strength of the country’s recovery. The broader capitalization-weighted Shanghai Composite Index eased 0.04% and the blue-chip CSI 300 Index slipped 0.95%. In Hong Kong, the benchmark Hang Seng Index retreated 4.5%, its biggest weekly decline since the end of October, according to Reuters     
Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets