A rather lacklustre US non-farm payrolls report for December wasn’t enough to prevent new record highs for US markets on Friday. However with the slightly slower pace of job gains, and softer than expected wages growth, it perhaps shouldn’t have been a surprise to see some profit-taking kick in ahead of the weekend, in a week which was characterised by strong gains, despite the tensions with Iran.
The 145,000 new jobs was slightly below expectations and did mean that 2019 was the weakest year for jobs growth since 2011, however with the unemployment rate already at a 50-year low, that’s probably not surprising. What was slightly more disappointing was that wages growth slowed to 2.9% from 3.1%, which in a supposedly tight labour market seems rather counterintuitive. This anomaly could be explained by the fact that the main sectors seeing jobs growth are in the services sector, while manufacturing is in recession. Manufacturing jobs tend to be more highly salaried while the main areas adding jobs appear to be in the retail, leisure and hospitality sectors, where salaries tend to be lower. Over the whole of 2019 the growth in manufacturing positions was over 200,000 below 2018 levels, and would also help explain why wages growth in December was the lowest since July 2018, as jobs in this sector fell back.
Against this sort of backdrop, it is hard to see the Federal Reserve doing anything other than a rate cut this year, assuming they cut at all, given the proximity of a US election in Q4. Bond yields did slip back slightly, and while the US dollar softened a little the weakness was nothing particularly substantive, in a week where the greenback hit a two-week high.
The main focus, in the absence of any fresh Iran tension, is likely to be on this week’s meeting between the US and China in Washington DC, and the expected signing of a phase-one trade deal on Wednesday, along with a host of economic reports including the start of US bank earnings season, at the end of the week.
These reports will be closely scrutinised for any signs of a slowdown in loan growth in all areas of the economy. In the previous quarter, most US banks showed that the US consumer was in pretty good shape with lower rates helping to fuel decent loan demand, with JP Morgan Chase posting record revenues in its last quarter. The challenge now will be not only can it match its last quarter, but with a slightly weaker economy, will forward earnings expectations for US banks get pared back?
Crude oil prices had quite a week, going from a three-month high to a three-week low, in the space of three days. While Iran tensions look to have come off the boil from the hysteria of a week ago, there still remains the potential for further volatility in the days ahead, and with the Iranian government having to deal with unrest at home, due to its belated admission to the shooting down of the Ukrainian airliner, it wouldn’t be a surprise for the Tehran administration try and distract its population with some bashing of the US.
It’s also a big data week for the UK economy with the latest economic reports prompting some dovish mutterings from Bank of England officials about the prospect of further rate cuts. Gertjan Vlieghe became the latest MPC member to lean in that direction in comments made over the weekend. As things stand, MPC members Michael Saunders and Jonathan Haskell are already in the rate-cut camp, voting for one in the last two meetings. With rates already close to record lows and global demand now starting to show signs of picking up, a 25bps rate cut is unlikely to make much difference, and in any case is already priced in by markets so would in all probability make no difference at all.
Today’s latest manufacturing and industrial production data for November is expected to come in on the weak side in any case, with declines of 0.2% expected in both. This should not be a surprise given the huge political uncertainty at the end of last year which saw businesses across the country delay important business decisions, due to the election in December. Against this sort of backdrop, policymakers would do well to adopt a bit of common sense, and wait until the December and January numbers are out, given that last month’s Conservative party election win could prompt a significant rebound in investment and economic activity in the weeks ahead. Over the past few years central bankers have been way too keen to cut rates and add stimulus, and far too cautious when it comes to raising rates and withdrawing support from the economy, with the Bank of England particularly guilty in that regard over the past 8 years.
EUR/USD – fell back towards the 1.1100 area last week, with the 50-day MA acting as support. A move below the 50-day MA could well open up a move towards the 1.1040 area. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400.
GBP/USD – came under pressure last week slipping towards the 50-day MA at 1.3010, a level which has so far currently held. A break below 1.3000 opens up the 1.2920 area. We need to move above 1.3220 to target 1.3500
EUR/GBP – tried and failed to move back above the 50-day MA last week at 0.8540, after finding support at the 0.8450/70 area. A sustained move back above 0.8540 targets the 0.8600 area.
USD/JPY – finding resistance at the 109.70 area and trend line resistance from the 2018 highs at 114.55. A break of this level has the potential to crack open the 110.70 area. Support comes in at last week’s lows at 107.65.
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