USA
• Nonfarm payrolls rose 467K in January, more than the +125K print expected by consensus. Adding to the good news, the prior months’ results were upgraded a massive 709K. Employment in the goods segment crept up 4K with gains in manufacturing (+13K) being partially offset by declines for both construction (-5K) and mining/logging (-4K). Services-producing industries, meanwhile, expanded payrolls by 440K, with notable increases for leisure/hospitality (+151K), professional/business services (+86K), retail trade (+61 K), transportation/warehousing (+54K), education/health (+29K) and information (+18K). Employment in the public sector advanced 23K. Average hourly earnings rose 5.7% YoY in January, 8 ticks more than in the prior month and way ahead of analysts’ forecasts calling for +5.2%. MoM, earnings were up 0.7%, the most in 13 months
• The household survey painted a bright picture of the situation, with a reported employment gain of 1,199K. Despite this progression, the unemployment rate still increased from 3.9% to 4.0% as the participation rate sprang from 61.9% to a post-pandemic high of 62.2%. Full-time employment soared 973K, while the ranks of part-timers swelled 136K. It is worth noting though that January’s household survey integrated the 2022 population control revisions. Removing theses from the calculus, employment was in fact down 272K, marking the first decline since April 2020
• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be fill ed increased a little in December from 10,775K to 10,925K. The ratio of job offers per unemployed person continued to rise, going from 1.54 to an all-time high of 1.61. The report also showed that hires plunged from 6,596K to 6,263K, a level 3.5% above this indicator’s pre-pandemic peak. Total separations, for their part, dropped from 6,205K to 5,900K as quits decreased from 4,499K, an all-time high, to 4,338K. All in all, the quit rate—the number of voluntary separations as a % of total employment—dipped from its highest level ever of 3.0% to 2.9%. The high number of quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers
• Initial jobless claims slid from 261K to 238K in the week ending January 29, suggesting that the worst of the Omicron wave might now be over. Continued claims, which lag data on new applications by one week, declined from 1,672K to 1,628K after two consecutive hikes.
• In January, the ISM Manufacturing PMI fell from 58.8 to a 14-month low of 57.6. Despite the pullback, the index remained at a level consistent with healthy expansion in the sector. The decrease was explained primarily by declines in production and new orders as the recent wave of infections due to the Omicron variant weighed in. This decrease in demand took pressure off manufacturers, as evidenced by the index measuring the backlog of orders dropping 6.4 points to 56.4. The sub-index tracking supplier delivery times decreased 0.3 points to a 14-month low of 64.6, which reflects an improvement in supply chain constraints.
Despite weaker demand and remaining supply chain problems, the employment index rose for a fifth month in a row to reach 54.5 (+0.6). Prices for materials used in the production process jumped 7.9 points to 76.1 in January, an increase probably attributable to higher oil and commodity prices
• The ISM Non-Manufacturing PMI fell abruptly for a second month in a row in January, dropping from 62.3 to 59.9 after hitting an all-time high of 68.4 in November. Despite the decrease, the January print topped consensus expectations (59.5), remained above the indicator’s pre-pandemic level, and was consistent with a solid pace of growth in the service economy. The new orders tracker (61.7 vs. 62.1 the prior month) and the business activity sub-index (59.9 vs. 68.3) retreated, as did the employment gauge (52.3 vs. 54.7). Contrary to what was observed in the manufacturing sector, the report indicated that inflationary pressures relented slightly among service providers. The prices paid gauge declined from 83.9 to 82.3. Of the 18 industries covered, 15 reported growth in the month
• Sales of real estate in the metaverse, a network of 3D virtual worlds, topped $500 million last year and could double this year, according to investors and analytics firms. Real estate sales on the four major metaverse platforms reached $501 million in 2021, according to MetaMetric Solutions. Sales in January topped $85 million, the metaverse data provider said. It projects that at this pace sales could reach nearly $1 billion this year
• Auto sales surprised with solid growth, reaching the highest level in seven months. The improvement can be attributed to a solid recovery in production, which was able to reduce the pre-pandemic gap from 30% in September to 8% in December. While chip shortages continue to affect the industry, anecdotal evidence suggests that Omicron has so far had a less dire impact on semiconductor supply chains compared to Delta
• Productivity rose at a 6.6% annualized rate in Q4, which is better than the 5.0% annualized decline in Q3. Productivity has seen volatile quarterly transitions as the pandemic and politics have led to uncertainty, but ended 2021 on a high note as Q4 output growth surged 9.2%. Even with compensation costs rising at a 6.9% annualized rate, the surge in productivity was enough to tamp down unit labor costs (ULC) growth to a mere 0.3% annualized rate in Q4. This offset reminds us that wage growth isn’t intrinsically inflationary as it can be accompanied by rising productivity. But ULC’s trend growth is running above 3%, surpassing the Fed’s 2% target
• December’s reading of construction spending also highlighted the continued fight against supply chain struggles. While spending eked out a 0.2% gain in the final month of the year, building material and labor shortages continue to cause delays and push input costs higher. Despite these issues, residential spending climbed 14.7% YoY lifted by another 1.1% rise in December. Strong buyer demand, even in the face of higher prices and mortgage rates, as well as low inventories have kept builders busy. Nonresidential spending did not have as successful of a month in December, sliding 0.7%. However, there were some positive signs that some of the nonresidential categories hit hardest by the pandemic are beginning to turn the corner. Both office and lodging spending increased over the month
• US Federal Reserve policymakers are set on raising interest rates in March but spoke cautiously on Monday about what might follow. Several Fed officials said the exact pace and timing of those moves would depend on what happens with inflation, the broader economy and the pandemic
• Equity markets remained volatile but recorded overall gains for the second consecutive week. Breaking with a pattern of value outperformance largely in place since November, growth and value shares performed similarly, while mid- and small-caps outpaced large-caps. It was one of the busiest weeks of the fourth-quarter earnings reporting season, with 112 companies in the S&P 500 Index scheduled to report results. These included several mega-cap names, which drove significant moves in the overall benchmarks. Meta Platforms’ report of a decline in Facebook’s average daily users and guidance for slower revenue growth resulted in a 26% decline in its stock price and wiped a record USD 232 billion off its market capitalization on Thursday. Conversely, Amazon.com’s report of better-than-expected earnings, driven in part by its Web services business, helped the indexes jump back Friday morning. Energy shares performed best, building on their significant lead for the year as U.S. oil prices rose above USD 90 per barrel and as major oil exporters agreed to stick to only a modest production increase in the face of high demand
• In terms of data release, NFIB Small Business Optimism Index is out on Tuesday. Small businesses have acutely felt the economic turbulence of the past year. The NFIB Small Business Optimism Index rose a scant 0.5 points to 98.9 in December, led by owners’ expectations for improved earnings, better economic conditions and increased employment. While confidence increased on the margin, several components of the NFIB’s survey remain at levels that suggest business owners are wary at best. For example, 22% of owners reported inflation was the single most important problem facing their business in December, the highest since 1981. Moreover, the share of owners that expect business conditions to improve has declined 23 points over the past six months to a net negative 35%
• CPI print is out on Thursday. While December’s 0.5% rise in the Consumer Price Index (CPI) was a slowdown compared to November, inflation has considerable momentum heading into 2022. The headline index rose to 7% year-over-year, the fastest pace since 1982 and the third straight month of above-6% annual gains. Red-hot durable goods prices have continued to drive the overall surge, and services inflation is meaningfully perking up. Excluding food and energy, the core CPI rose 0.6% over the month, up 5.5% on an annual basis. Core goods prices accelerated 1.2% in December, driven largely by gains in vehicle prices, while core services inflation came in at 0.3%, a touch softer than November
UK
• The Bank of England raised rates by 0.25 % to 0.5%, in line with market expectations; this follows on from a 0.15 % point rise in rates in the beginning of December. More surprising was the fact that four Monetary Policy Committee members voted to raise rates by 0.5 % to 0.75%. This will further add to the expectation by many market observers that the Bank will raise rates three more times this year, to reach a target rate of 1.25% by year end – effectively shadowing much of the expected Fed rate trajectory. Handelsbanken’s own forecast had seen a further 0.25 % point rate rise this summer, but was more cautious about the prospects for further rises later this year. Consensus was the economy would slow more dramatically than is the general consensus due to a combination of tax rises, inflation and energy price hikes hitting consumer expenditure. Given better than expected consumer expenditure over the course of 2022, it is possible the second expected rate rise will be anticipated to (a still very accommodating) 1.0% from Jan 2023 to November 2022. The ultimate target level for interest rates, the neutral rate, also remains an open question. According to the Brookings Institute, the neutral rate for the US is around 2.5%; given the UK’s historically more inflation prone economy, it could be expected that the neutral rate would be marginally higher. But given levels of asset prices, which have over the past decade risen to adjust to low rates, even gradual moves towards such a target level would result in a recession long before such a level was reached
• The key driver of the decision is of course inflation. The Bank of England has been steadily raising its inflationary expectations over the course of the last year, and it now expects inflation to peak at 7.25% this spring, before falling below its target level of 2% in late 2024. There is consensus that inflation will drop away over the latter half of 2022 and into 2023, but even at the end of 2023. It is likely that an absence of deflationary pressures (from energy prices merely plateauing rather than falling, to the appearance of service sector inflation, to the changing nature of globalisation) will mean meeting the BoE target will be extremely difficult
• In terms of data release, UK GDP print is out on Friday. Next week’s fourth quarter GDP figures will offer insight into how the U.K. economy fared late last year, heading into the onset of a surge in COVID cases during December. For Q4, GDP is expected to grow just 1.1% QoQ, which would match the growth in Q3. Reflecting a slump in December retail sales, growth in Q4 consumer spending is forecast to slow to 1.0% from the 2.7% gain seen in Q3, while investment spending is expected to rebound by 1.0% in Q4 after registering a 0.9% decline in Q3. The U.K. economy is likely to start 2022 on a subdued note amid the rise in COVID cases and some temporary caution on the part of consumers and businesses. Moreover, the fourth quarter ended on soft note and that sluggish momentum that will likely carry over into early 2022
EU
• The ECB kept its key policy rates, instruments, and guidance unchanged. Key interest rates are set to “remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.” As in previous announcements, the ECB stated that this “may also imply a transitory period in which inflation is moderately above target.” Its previous decision relating to PEPP net purchases and duration, as well as APP net purchase amounts for Q2, Q3, and Q4 and onwards was repeated without change. A notable change in the wording could be found in the next to last paragraph of the statement. In December, the sentence read “The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term.” In the most recent statement, the phrase “in either direction” had been removed
• In the press statement, President Lagarde acknowledged the upside surprise to January inflation upfront, saying that this was “primarily driven by higher energy costs that are pushing up prices across many sectors, as well as higher food prices.” Moreover, she acknowledged further that “inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year.” Flexibility and optionality in the conduct of monetary policy is needed “more than ever”, she said. In terms of economic activity, President Lagarde noted that economic activity and demand will likely remain muted in the early part of this year, primarily due to factors such as containment measures, high energy costs, as well as supply chain disruptions. There are signs that these bottlenecks may be starting to ease, but they will still persist for some time. The ECB continues to see no evidence of higher wage growth, although the expectation that this will increase is an important foundation for its inflation outlook
• Eurozone inflation in January rose to 5.1 % YoY, compared to 5 % in the previous month, and was above expectations. Energy had the highest annual rate (28.6 %, compared to 25.9 % the month before), followed by food, alcohol & tobacco (3.6 %, compared to 3.2 %), services (2.4 %, unchanged), and non-energy industrial goods (2.3 %, compared to 2.9 %). Meanwhile, core inflation fell to 2.3 % this month, compared to 2.6 % in the previous one, which was also above expectations. The releases in January (December) were as follows: France 3.3 % (3.4%), Germany 5.1 % (5.7%), Italy 5.3 % (4.2%) and Spain 6.1 % (6.6%)
• Energy drove an unusually noisy January inflation above expectations and also represented nearly two thirds of the bloc’s total y-o-y percentage change. Among countries, Italy and the eurozone periphery pushed annual inflation higher. In Germany, core inflation was higher than expected, either because of VAT having a smaller- than-expected effect or because underlying price pressures were stronger than expected. Meanwhile, large energy price hikes in Italy also contributed significantly to the eurozone aggregate outcome
• The Eurostat flash estimate of Q4 GDP growth for the Eurozone came in at +1.2% annualized (+0.3% non-annualized). For 2021, GDP grew 5.2%. Coming in the wake of a strong advance in Q3 (+9.5% annualized), the gain in Q4 left output 2.5% below its pre-crisis summit. The expansion was driven by Spain (+8.0% annualized), Portugal (+6.4%), and Sweden (+5.6%), where growth was sturdier than what economists forecast. Growth figures in Austria (+8.8%) and Germany (+2.8%), on the other hand, came in shy of consensus expectations. Looking ahead, the Eurozone faces some tough challenges. Although the epidemiological situation now appears under control, the single-currency area is dealing with a marked rise in energy prices that threatens to erode the purchasing power of consumers. Supply shortages and production constraints are other elements that could weigh on growth going forward
• Equities in Europe weakened after European Central Bank (ECB) President Christine Lagarde made comments that appeared to leave the door open for a possible rate increase this year. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.73% lower. Major indexes slipped as well. Germany’s Xetra DAX Index fell 1.43%, while France’s CAC 40 Index slipped 0.21%. Italy’s FTSE MIB Index posted a modest gain.
CHINA
• The Caixin/Markit Manufacturing PMI fell to 49.1 in January, its lowest level since February 2020, from 50.9 in December, suggesting that smaller, private firms in China struggled last month. China’s official manufacturing PMI surveys mostly big and state-owned firms, while the private Caixin survey focuses on smaller, export-focused companies
• More evidence of falling sales reflected continued pressure on China’s cash-strapped property sector, which has been suffering a liquidity crisis since last year. Sales for the 100 biggest companies in the property industry slumped 39.6% in January from a year ago compared with December’s 35.2% decrease, according to preliminary data by China Real Estate Information Corp.
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• The sustained sales decline and tougher funding conditions may put further strain on the property sector’s ability to service its substantial debt. A significant worsening in economic data or an increase in defaults among suppliers, larger developers, or local government financing vehicles are among the things that could lead the government to take more decisive action. In the meantime, Beijing is likely using the current downturn as an opportunity to realize long-term goals, such as curbing property sector speculation, increasing housing affordability, and making China’s economy less dependent on real estate
• China’s financial markets were closed during the week for the Lunar New Year. In economic news, government purchasing managers’ surveys for January showed a moderation in factory production and services. The official manufacturing Purchasing Managers’ Index (PMI) declined to 50.1 from December’s 50.3 reading, and the nonmanufacturing gauge—which measures activity in the construction and services sectors—fell to 51.1 from 52.7. The 50 mark separates expansion from contraction
• Sources: T. Rowe Price, National Bank of Canada, MFS Investment Management, Handelsbank Capital Markets, Wells Fargo, TD Economics, M. Cassar Derjavets