| USA Nonfarm payrolls rose 216K in December, more than the median economist forecast calling for a +175K print. This positive surprise, however, was offset by a -71K cumulative revision to the previous months ‘data. Employment in the goods sector in December advanced 22K thanks in large part to a 17K gain in the construction sector on the back of non-residential building activity. Manufacturing payrolls also expanded (+6K) following the end of the UAW strike, although the rebound of the past two months was not enough to offset the October loss. Jobs in services-producing industries, for their part, expanded 142K, with notable increases for health/social assistance (+59K) and leisure/hospitality (+40K). Alternatively, cuts were observed in transportation/warehousing (- 23K) and other services (-1K) while utilities were flat (0K). Another weak point in the report was employment in the temporary help services category, which tends to be a good leading indicator for the labour market as a whole and saw payrolls drop 33K, its 10 consecutive monthly decline In total, 164K jobs were created in the private sector, compared with 52K in the public sector, the latter tilted towards state/local administrations. Average hourly earnings progressed a consensus-topping 0.4% in December, pushing the annual increase to 4.1% YoY, one tick higher from the previous month and two ticks above consensus expectations. Released at the same time, the household survey (similar in methodology to Canada’s LFS) painted a different picture of the situation prevailing in the labour market, with a reported 683K decrease in employment. Despite this sizeable loss, a three-tick decrease in the participation rate translated into no change for the unemployment rate, at 3.7%. Full-time employment collapsed 1531K in the month, while the ranks of part-timers swelled 762K. The weakness in temporary help services employment as well as the significant drop in full-time employment suggest that tight monetary policy is starting to have a more pronounced impact on U.S. labour markets. As the employment-to-population ratio continues to fall, and GDP growth is expected to surprise to the downside in the coming months Construction spending advanced 0.4% in November after progressing an upwardly revised 1.2% the prior month (initially estimated at +0.6%). The monthly gain reflected an increase in the private sector (+0.7%), while spending in the public sector declined (-0.7%). In the former, spending on residential projects sank 2.2%, while outlays on non-residential structures were down 0.6% The S&P CoreLogic Case-Shiller 20-City Home Price Index rose 0.6% MoM in October to an all-time high. This was the indicator’s eighth consecutive monthly advance, though the pace had been slowing since May. Prices were up in 19 of the markets covered, led by Detroit (+1.2%), Phoenix (+1.1%), Boston (+1.0%), Las Vegas (+0.9%), and Miami (+0.9%). YoY, prices rose 4.8% at the national level, a fourth consecutive progression. Although demand remained weak on the real estate market, very tight supply, combined with a strong labour market, likely kept driving prices up in the following months. That said, only modest gains are expected in November and December, as purchasing power continued to suffer from elevated borrowing costs The ISM Manufacturing PMI increased from 46.7 in November to 47.4 in December, overshooting the 47.1 print expected by consensus. Despite this increase, the index remained below the 50-point mark separating expansion from contraction for the 14th month in a row, its longest such streak in more than two decades Output (from 48.5 to 50.3) shot back up into expansion territory in December, while new orders (from 48.3 to 47.1) contracted for the 16th straight month. Such a long series had not been observed since 1982. Weak demand conditions allowed factories to keep clearing backlogs, though the pace of contraction decelerated (from 39.3 to 45.3). This encouraged firms to reduce payrolls for the third month in a row, though also at a slower pace (from 45.8 to 48.1). Signs of supply chain improvements remained visible in the report as the gauges measuring prices paid (from 49.9 to 45.2) and sup-plier delivery times (from 46.2 to 47.0) stayed below 50 The Household Survey indicated a dip in both employment and labor supply alongside a slight increase in the number of unemployed. As a result, the labor force participation rate fell to its lowest reading since February. Although there could be more scope for labor supply to grow, any gains to participation ahead are likely to proceed at a slower pace. The unemployment rate remained unchanged at 3.7% in December, while average hourly earnings ticked up a bit faster than expected at 0.4% over the month, suggesting there may be some upside risk to inflationary pressures stemming from the labor market The minutes from the December FOMC meeting contributed to the softening in expectations for interest rate cuts this week. After the Fed signaled that the policy rate would head lower in 2024, there was an anticipation that rate cut talk may have featured heavily at the last meeting. Committee participants confirmed that the policy rate was “likely at or near its peak for this tightening cycle”, given the reduction in inflation in 2023 and “growing signs of demand and supply coming into better balance in product and labor markets”. But, meaningful debate on rate cuts was missing. Instead, the discussion was somewhat more balanced, touching on both the risks of maintaining rates in a restrictive position for too long and the risks of prematurely easing policy. Participants noted that their outlooks were associated with an “unusually elevated” degree of uncertainty and stressed the importance of maintaining a data-dependent approach to setting monetary policy Stocks gave back a portion of the past several weeks’ solid gains as investors appeared to rotate into sectors that lagged in 2023, including utilities, energy, consumer staples, and health care. Conversely, a slide in Apple shares following an analyst downgrade weighed on the large-cap, technology-heavy Nasdaq Composite Index. The small-cap Russell 2000 Index also fell more than the broad market. Trading volumes were relatively muted over much of the holiday-shortened week, with markets shuttered on Monday in observation of the New Year’s Day holiday. Geopolitical concerns appeared to weigh on sentiment as 2024 trading began. Over the previous weekend, and in advance of upcoming elections in Taiwan, Chinese President Xi Jinping stated that “the reunification of the motherland is a historical inevitability.” (According to Reuters, the official English translation was perhaps less pointed, stating that “China will surely be reunified.”) Investors also appeared worried about a further escalation of tensions in the Red Sea, with Iran sending a warship and the U.S. sinking attacking ships armed by Houthi rebels from Yemen In terms of data release, the NFIB Small Business Optimism is out on Tuesday. The National Federation of Independent Business Small Business Optimism Index was largely listless in 2023, hovering well below the levels that prevailed before the pandemic. That said, the NFIB Index was not a great guide to economic and financial market outcomes last year. Real GDP growth appears to have been at or above potential, unemployment remained low and equity markets posted solid gains for the year CPI is out on Thursday. Headline inflation as measured by the Consumer Price Index (CPI) was tame in October and November, the two most recent data points. The CPI was unchanged in October and increased just 0.1% in November. Significant declines in energy commodity prices, such as gasoline, helped to keep headline inflation in check. Excluding food and energy prices, the core CPI has been increasing at a 0.2%-0.3% monthly pace for the past several months, a slowdown from its pace earlier in the year and in 2022. UK Consumer credit for November came in at GBP 2.005bn, down from GBP 1.4bn in October, largely due to increased credit card spending in the run up to Christmas. The general levels of consumer credit are still within historical norms. Net lending to individuals in November was GBP 1.97bn, up from GBP 1.3bn in October. There is always a bit of seasonality to these figures, but the key to to realise that “normal” levels of borrowing are closer to GBP 5bn, so data is a reflection of a degree of ongoing consumer caution. These numbers are worth watching as they tell us that the consumer is, so far, not seeing the sorts of severe stresses which might drive up stress-induced borrowing. Adding notes of caution, UK non-financial businesses repaid, on net, GBP 1.6bn of loans in November, following net repayments of GBP 1.8bn in October Mortgage approvals came in at 50.06k (consensus 48.5k). While this is better than expected, it is still well below historical norms which sit around 70k. House prices might have a bit further to fall and a recovery is really only going to take hold as interest rates begin to be reduced in the summer. Given people’s natural reluctance to sell into a falling market, illiquid markets might continue for a few months yet Demand for loans to purchase homes continued to recover—albeit from low levels—continued in the final month of 2023. Mortgage approvals increased to just above 50,000 from 47,890 in November, according to the Bank of England. Lower mortgage rates and hopes of a cut in borrowing costs contributed to a 1.1% month-over-month uptick in home prices, according to a survey by mortgage lender Halifax. EU The flash estimate for the Consumer Price Index showed that prices rose 2.9% YoY in December, up from the 2.4% YoY the prior month and in line with the consensus expectations. It was also the first increase in inflation since April as some government aid programs to help cover household energy bills came to an end in December. As a result, energy prices went from -11.5% in November to -6.7% in December. On the other hand, food alcohol and tobacco inflation decreased from +6.9% to +6.1%. The core CPI, which excludes these four items, fell from 3.6% to 3.4% as expected by the consensus The number of unemployed Germans rose by a seasonally adjusted 5,000 to 2.703 million in December, much less than the 20,000 increase that analysts polled by FactSet had expected. The seasonally adjusted jobless rate rose slightly to 5.9% In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.55% lower and snapped seven consecutive weekly gains, as optimism for an early cut in interest rates waned. Major stock indexes mainly fell. France’s CAC 40 Index declined 1.62%, while Germany’s DAX lost 0.94%. However, Italy’s FTSE MIB eked out a 0.29% gain. CHINA The private Caixin/S&P Global survey of manufacturing activity rose to an above-forecast 50.8 in December from November’s 50.7, its strongest reading since August. The private Caixin survey of services activity reached its highest level since July and beat estimates. On the monetary policy front, the People’s Bank of China injected RMB 350 billion via its Pledged Supplemental Lending program, a low-cost funding program aimed at policy-oriented banks, in its latest effort to shore up the property sector. The controversial tool was heavily used between 2014 and 2019 as a source of government funding to rebuild shantytowns. China’s 10-year government bond yield dropped to 2.54% on the morning of Thursday, January 4, its lowest level since April 2020, as the central bank’s liquidity support fueled expectations that it will cut interest rates this year to aid growth New home sales by the country’s top 100 developers fell 34.6% in December from the prior-year period, up from the 29.6% drop in November, according to the China Real Estate Information Corp. The housing downturn continues to drag on China’s economy as falling home prices, construction delays, and builder defaults weigh on consumer sentiment The official manufacturing Purchasing Managers’ Index (PMI) contracted for the third consecutive month, falling to a below-consensus 49.0 in December as declines in new orders and exports accelerated. The nonmanufacturing PMI rose to 50.4 from 50.2 in November as stronger construction activity offset weakness in the services sector. Readings above 50 represent growth from the prior month Stocks in China retreated amid persistent concerns about its economy. The Shanghai Composite Index fell 1.54%, while the blue-chip CSI 300 gave up 2.97%. In Hong Kong, the benchmark Hang Seng Index declined 3%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, M. Cassar Derjavets. |
