Economic Outlook – 8 January 2023


Nonfarm payrolls rose 223K in December, slightly more than the +203K print expected by consensus. Compensating for this positive surprise, the previous month’s data were revised downward a cumulative 28K. Taking these revisions into account, nonfarm payrolls were roughly in line with expectations and signaled weaker, albeit still healthy, job gains. Employment in the goods sector sprang 40K on gains for construction (+28K) and manufacturing (+8K) and, to a lesser extent, mining/logging (+4K). Jobs in services producing industries, meanwhile, expanded 180K, with notable increases for health/social assistance (+74K) and leisure hospitality (+67K). Alternatively, headcounts shrank in the professional/business services (-6K) and information (-5K) segments. Employment in the public sector edged up 3K, with gains split between federal (+1K) and state-local (+2K) administration. Gains in the private sector remained quite good (+220K) but aggregate hours declined for the second time in a row as average weekly hours worked fell from 34.4 to a 32-month low of 34.3. Average hourly earnings rose 4.6% YoY in December, down from 4.8% the prior month and the least in 16 months. MoM earnings progressed 0.3%, one tick less than the median economist forecast calling for a 0.4% gain The household survey painted a much more upbeat picture of the situation prevailing in the labour market, with a reported 717K increase in employment. Although partially offset by an increase in the participation rate (from 62.2% to 62.3%), this gain nonetheless translated into a one-tick decline of the unemployment rate to 3.5%. Full-time employment stayed essentially unchanged (-1K), while the ranks of part-timers surged 679K. This employment gain followed a long period of underperformance compared with the establishment survey. Even after accounting for this late surge, job creation for the whole of the year remained 1.3 million weaker than that reported by establishments (3.2 million vs. 4.5 million) The ISM Non-Manufacturing PMI unexpectedly plunged into contraction territory in December, moving from 56.5 to a 31-month low of 49.6. Outside of the pandemic period, this was the second largest monthly decline ever observed for that indicator (after the 7.7-point dive recorded in January 2008). Growth in business activity (from 64.7 to 54.7) slowed down sharply while new orders (from 56.0 to 45.2) shrank at the fastest pace since 2009 excluding the pandemic period. The employment sub-index (from 51.5 to 49.8) also eased, signaling marginal job losses. On the supply chain front, delivery times (from 53.8 to 48.5) shortened for the first time since May 2019 and the most since late 2015. Input prices (from 70.0 to 67.6) continued to advance, albeit at the least pronounced pace in two years. Of the 18 industries covered, 11 reported growth in December. The decline in the ISM index was exacerbated by poor weather conditions which caused numerous power outages and disrupted the travel plans of several households The ISM Manufacturing PMI slipped from 49.0 in November to 48.4 in December, marking a second straight contraction in factory activity and the steepest since the early months of the pandemic. Output (from 51.5 to 48.5) shrank for the first time since May 2020, while new orders (from 47.2 to a 31-month low of 45.2) fell further below the 50-point mark separating expansions from contractions. Despite weaker demand conditions, the employment gauge (from 48.4 to 51.4) signalled a slight expansion in payrolls after a decline the prior month The Pending Home Sales Index faltered 4.0% to 73.9 in November, its lowest level on record excluding the first month of the pandemic. This was the sixth consecutive monthly decline registered by this indicator. While a decline was expected amid increasing interest rates, its magnitude was larger than anticipated by consensus. Drawbacks were widespread in all four U.S. regions covered According to the S&P CoreLogic Case-Shiller 20-City Index, home prices fell a seasonally adjusted 0.52% in October, marking the fourth consecutive decline for this indicator. For the third consecutive month, all the 20 markets surveyed saw prices drop in the month. Declines were led by Las Vegas (-1.3%), Phoenix (-1.2%), San Francisco (-0.9%) and Dallas (-0.9%). YoY price appreciation slowed from 10.4% to a 24-month low of 8.7%. Considering the rapid rise in borrowing costs and the sharp drop in home sales, prices are expected to decline further in the coming months The trade deficit moved from $77.8 billion in October to $61.5 billion in November, marking the third largest monthly change (-$16.3 billion) in the trade balance in data going back to 1992. The narrowing was due in large part to a 7.5% plunge in goods imports (to $254.9 billion) – the fourth biggest decline on record –, led by pharmaceutical preparations (-$2.9 billion), cell phones (-$2.7 billion), crude oil (-$1.7 billion), passenger cars (-$1.6 billion) and computers (-$1.1 billion) FOMC meeting minutes released on Wednesday unsurprisingly echoed earlier sentiments expressed by Chair Powell at his December 14th press conference. Members pushed back against the loosening of financial conditions seen in recent months on the back of softer inflation reports, noting that “an unwarranted easing in financial conditions…would complicate the committee’s effort to restore price stability”. The minutes reiterated that “it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path”, and this was further emphasized by the fact that no committee members foresee cutting rates this year Minneapolis Fed President (and 2023 FOMC member) Neel Kashkari also released an essay on Wednesday in which he noted the need to raise rates by another 100bps this year, which helped to briefly push the odds of a 50bps hike in February close to 50%, though they have since declined back to roughly 25% Top US banking regulators including the Fed and the Federal Deposit Insurance Corporation issued a statement on Tuesday highlighting the risks posed to the banking systems by crypto-assets. Among the perils focused on were fraud among market participants, legal uncertainties around custody practices, contagion risks within the crypto ecosystem and its lack of mature, robust risk management and governance A Friday rally following an encouraging jobs report left the major indexes with a gain to start the year. Communication services stocks led the gains, helped by rallies in Charter Communications, Netflix, and Facebook parent Meta Platforms. Trading volumes were subdued over most of the week, remaining below 2022 averages. The S&P 500 Index also continued to move within a relatively tight band compared with most of 2022, with the index staying between 3,764 and 3,906 since December 16. The market was closed on Monday in observance of New Year’s Day In terms of data release, CPI print is out on Thursday. The food component likely remained relatively strong, but this increase should have been more than compensated by lower gasoline prices. As a result, headline prices could have decreased 0.1% m/m. YoY rate should come down from 7.1% to 6.7%. The core index, meanwhile, may have continued to be supported by rising rent prices and advanced 0.3% on a monthly basis. This would translate into a two-tick decline of the 12-month rate to 5.8% Consumer sentiment is out on Friday. The University of Michigan’s measure of consumer sentiment remains well below pre-pandemic levels and varying conditions throughout the economy appear to have left consumers confused. Assuredly, there are major challenges ahead for the average household—the labor market is set for a slowdown, inflation is decelerating but still remains near an annual rate last seen in the 1980s and housing costs are unaffordable for many, as high home prices are bolstered by rising mortgage rates and apartment rents remain elevated. But even with that in mind, falling inflation (particularly falling gasoline prices) may start to provide a boost to sentiment. Specifically, consumer expectations for the year ahead fell to the lowest annual rate in a year and a half     


Net borrowing of mortgage debt by individuals increased from GBP 3.6bn to GBP 4.4bn in November. However, mortgage approvals (which are an indicator of future borrowing) plunged to 46,100 in November, down from 57,900 in October. This puts mortgage approvals at the lowest level since June 2020 and provides another indicator of slowing demand for UK housing as the rising interest rate environment bites. It is expected that mortgage approvals will remain at depressed levels for some time to come. Nationwide’s annual house price index has already shown four consecutive monthly declines in UK house prices. The correction in the housing market is expected to continue, with house prices observing a projected average nominal drop of nearly 10% from peak levels Updates next week from Britain’s biggest retailers including Tesco, Sainsbury’s and Marks & Spencer are expected to confirm that while Christmas was not the disaster that some had feared, consumer demand is set to weaken in 2023, denting profit. Ahead of Christmas, European retailers fretted that the key trading period could be the worst in at least a decade. But in Britain, despite UK inflation running at 10.7% and consumer confidence close to record lows, retailers that have reported so far on festive sales, including clothing retailer Next (NXT.L), fast food chain Greggs (GRG.L) and discounters B&M (BMEB.L) and Aldi UK have performed well. Though train and postal workers strikes caused some disruption to trade, Christmas 2022 was the first not impacted by COVID-19 restrictions since 2019 and despite the ongoing cost of living challenges Britons appear to have prioritized festive spending. But the consumer outlook for 2023 is poor, with the government’s budget watchdog having predicted the biggest squeeze on living standards since records began in the 1950s. 


A decline in energy price increases helped push eurozone inflation below 10% for the first time in two months, official data showed. Consumer prices in December rose 9.2% year over year, below a FactSet consensus estimate of 9.7%. Even so, the core inflation—which excludes volatile food, energy, alcohol, and tobacco prices—quickened to 5.2% from 5.0% in November. Banque de France Governor François Villeroy de Galhau, who is a European Central Bank (ECB) policymaker, said in his new year address that interest rates would need to rise further to reduce underlying price pressures and suggested that they could peak this summer. He also said that the ECB should be prepared to leave borrowing costs at the terminal level for as long as necessary to squeeze inflation out of the system. Swap rates tied to ECB policy meeting dates are signaling that the deposit rate could peak around 3.5% A final reading of S&P Global’s composite Purchasing Managers’ Index (PMI)—which measures business activity in the services and manufacturing sectors—signaled that a eurozone recession this year might be shallower than expected. The index was revised higher to 49.3 from a first estimate of 48.8. While the PMI was still below 50, indicating a contraction in activity, the index rose for a second consecutive month Shares in Europe surged as data indicated that the pace of inflation has slowed. The cost of natural gas also fell to levels last seen before Russia invaded Ukraine. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 4.60% higher. Major stock indexes also advanced. Germany’s DAX Index gained 4.93%, France’s CAC 40 Index climbed 5.98%, and Italy’s FTSE MIB Index soared 6.22% CHINA The official Purchasing Managers’ Index (PMI) data for manufacturing and non-manufacturing fell in December. Overall, the composite PMI fell to 42.6 from 47.1 in November, marking the biggest decline since February 2020, before the coronavirus outbreak. The drop in economic activity was largely attributed to the surge in infections after China abandoned its zero-COVID approach in early December. Meanwhile, data from a private survey showed China’s manufacturing, services, and property sectors weakened sharply in the fourth quarter of 2022 due to virus-related disruptions, raising the prospect that the economy may have contracted in the final months of last year Hopes of further support for property developers rose following news that Beijing may ease the stringent “three red lines” policy that featured prominently in the government’s crackdown on the real estate sector in 2020, Bloomberg reported, citing unnamed sources. The policy consisted of a series of debt thresholds aimed at curbing leverage among developers seeking to borrow more. China is also considering a nationwide cap between 2.0% to 2.5% on real estate commissions to boost demand, Bloomberg reported. Separately, the People’s Bank of China announced that first-time homebuyers would be offered lower mortgage rates if new home prices fall for three consecutive months The changes mark a significant shift in China’s real estate policy, following a series of measures introduced since November to restore confidence in a sector that accounts for almost a quarter of the nation’s economy. In recent weeks, the government has stepped up calls to expand fiscal spending and softened its policy stance for various industries, including internet platforms and coal imports, underscoring Beijing’s focus on prioritizing economic growth Chinese equities rose amid reports that Hong Kong would reopen its border to mainland China and that Beijing was considering relaxing curbs on borrowing for the ailing property sector. The Shanghai Composite Index advanced 2.21% and the blue-chip CSI 300 gained 2.82%, marking its biggest gains in weeks    
Sources: T. Rowe Price, MFS Investments, Wells Fargo, TD Economics, Handelsbanken Capital Markets, National Bank of Canada, Reuters, M. Cassar Derjavets