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Could good US payrolls mean bad news for US markets?

jobs section of a newspaper

It’s been a generally positive start to 2023 for European markets as hopes that inflation has peaked, along with lower oil and gas prices, prompts optimism that central banks may not have to tighten as aggressively as feared at the end of 2022. 

Today’s EU flash CPI for December could add further fuel to this peak inflation narrative if as expected headline inflation falls to 9.5% from the 10.1% seen in November, although any resilience in the core numbers would take some of the edge of this.

The FTSE 100 has also seen a solid start to the year, picking up where it left off last year, closing higher for the third day in a row, and at eight-month highs. US markets, on the other hand have been slightly more cautious, with a continued resilience in economic data fuelling concerns that the Federal Reserve still has some way to go before it finds its terminal rate, pushing the Nasdaq 100 and S&P 500 down towards their December lows.

The weakness seen in the US doesn’t appear to be affecting European markets for the moment, with a higher open expected this morning, however this could change if the Nasdaq 100 takes out its 2022 lows, which aren’t too far from current levels.  

The surprise with the November US jobs report was a jump in the pace of average hourly earnings given it helped to temporarily undermine a narrative that US inflation was on a downward path and probably wouldn’t be as sticky as was being priced at the time. Not only did November wages jump to 5.1%, but October wages were revised up to 4.9% from 4.7% in a manner that suggested that while headline inflation was continuing a trend of slowing down, core and services inflation was becoming stickier, and still edging higher.

This also appears to be an area that is causing the Federal Reserve some concern, given the tone of the commentary from some Fed officials. The expected slowdown to a 50bps rate hike last month wasn’t a surprise to markets, however there appears to be an increasing focus of where the terminal rate is, and how long rates are likely to remain at current levels, or higher. This is where the picture becomes much murkier, with today’s payrolls report for December set to point to further resilience in the US labour market.

Yesterday we saw the ADP payrolls report as well as the latest weekly jobless claims numbers come in much better than expected. In December ADP reported a gain of 235,000 jobs, with average wages coming in at 7.3%, while weekly jobless claims fell sharply from 225,000 to 204,000. The resilience of these numbers has lent support to the idea that we will probably see the Fed hike rates by another 50bps at the start of February, pushing the funds rate up to 5%, with the potential for at least another 50bps by the end of Q1. Of course, there is also a case for arguing that temporary hiring in the leadup to Thanksgiving and the Christmas period could have offered an uplift at a time when the US labour market is extraordinarily tight, as December looks to add to the 263,000 jobs that were added in November. 

Today’s December non-farm payrolls number is expected to show a slowdown to 203,000; however, this could be understating things given that most of the estimates in recent months have come in below the actual numbers. What is slightly more worrying is the inability of the participation rate to show any signs of increasing, falling back to its lows of the year at 62.1%, while unemployment rose to 3.7%. No changes are expected to either of these. Nonetheless, the attention today will be less on the headline numbers, but on how many services jobs are added, as well as the pace of any wage gains, as some FOMC members fret about the prospect of a wage price spiral.

Yesterday’s ADP report showed wage growth came in at 7.3%, led by a 10.1% increase in hospitality and leisure roles, which tend to be at the lower end of the wage range in any case. This resilience, while welcome to those at the lower end of the income scales, won’t offer comfort to the Federal Reserve who fear spiralling wages, and ahead of next week's December CPI report, where it is widely expected that core inflation will see a fall below 6% to 5.7%.

Today could be yet another example of good news being bad news for stocks, as rising rates and a stronger currency exert downward pressure on valuations. That was certainly the case yesterday for the Nasdaq 100 and S&P 500, as the prospect of lower rates gets pushed further out into 2023 and into 2024.     

EUR/USD – slipped back to 3-week lows yesterday having failed to break through the 1.0700 level at the end of last year. A move below the 1.0500 area opens up the prospect of a return to the 1.0380 area and 50-day SMA.

GBP/USD – has continued to slide back after the December peaks of 1.2450, with the break below the 1.2000 level yesterday opening up the risk of a move towards the 1.1820/30 area, where we have support. A move below 1.1800 opens up the risk of 1.1720.

EUR/GBP – currently seeing resistance at the 0.8870/80 area, with a break targeting a potential move to the 0.9000 area. Support currently at the 0.8770/80 area with a break below opening up the risk of a move towards the 50-day SMA at 0.8690.

USD/JPY – having hit a 6-month low at 129.50 at the start of the week, the US dollar has rebounded with resistance currently at 134.50 and the highs last week. We also have the 200-day SMA at 136.00, which needs to cap to keep the current down move intact.

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