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US payrolls boost the inflation narrative

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It’s been a mixed finish to an otherwise positive week for European equity markets, with the FTSE 100 outperforming today, due to outperformance from financials as well as basic resources, after the latest US non-farm payrolls report showed that wages pressure in the US economy is building, while the unemployment rate fell to pre-pandemic levels of 3.9%

Europe

Higher yields are once again favouring the UK banks, with Barclays, Standard Chartered, and Lloyds Banking Group outperforming, while the likes of Antofagasta, BHP, and Rio Tinto are being buoyed by firmer aluminium and copper prices.

Aston Martin shares are higher after the company gave a preliminary update on full year trading. For Q4 the car company said it shipped fewer of its Valkyrie vehicles than expected which means that full year EBITDA will be £15m lower than forecast. This was down to production issues and merely means that the profits from the ordered vehicles when completed will appear in next year’s numbers instead. For the full year DBX sales accounted for 3,001 units.

Royal Dutch Shell shares have shrugged off a warning around the profitability of its oil refining business, which is still being affected by the extensive repairs needed due to damage caused by hurricane Ida. Shell said it was likely to see a Q4 loss in this unit, but that it had largely resolved its gas production problems that caused it to underperform in its Q3 numbers, and that Q4 would be much better, with higher gas prices also playing a part.  Shell also said it would be accelerating its share buyback programme.

Sainsbury's shares have slipped back ahead of their trading update numbers next week, after the food retailer announced it would be spending £100m on raising staff wages by 5.3% from March as it looks to retain its staff. While this is no doubt a good a thing, it has raised concern it might adversely affect its profit margins in the short term.    

US

US markets opened flat after what on the face of it was a disappointing non-farm payrolls report on the headline number, which saw 199,000 new jobs added. This was well below expectations of 450,000 and missed to the downside for the second month in a row.

It had already been quite a difficult couple of days for US markets, after the sharply negative reaction following the release of Wednesday’s Federal Reserve minutes, which sent yields sharply higher, and today’s US payrolls have done little to diminish this upside pressure, pushing the 5-year yield to its highest level since January 2020, above 1.5%.

While the headline number missed expectations, other aspects of the report were much more positive, with the unemployment rate falling to 3.9%, and back to the levels it was pre-pandemic, while the participation rate came in at 61.9%. More importantly, wages were much more resilient rising 4.7%, well above expectations of 4.2%, while the November numbers were revised up to 5.1% from 4.8%. These wages numbers appear to be what has driven yields higher this afternoon, as it becomes more apparent that the Fed is running out of excuses not to raise rates in the coming months.

US employers are having to pay up to get people back into the workforce and this is something that the Fed will consider when they look at the timeline for when to make their first move. Next week’s US CPI numbers for December will also add some spice to the discussion with estimates that we could see the headline number come in at 7.1%, up from 6.8% in November. The move higher in yields also appears to be weighing on risk sentiment more broadly with the Nasdaq continuing to look heavy, as US markets finish the first week of 2022 very much on the back foot, ahead of next week’s big CPI print.

GameStop shares have jumped higher after it was reported that the retailer was entering the NFT and Cryptocurrency markets as part of its wider turnaround plan, as it looks to try and turn around a tired and dated business model.    

FX

It’s been a decent start to the year for the US dollar, as it benefits from the prospect that the Federal Reserve could well lead the way when it comes to tightening monetary policy in an attempt to deal with concerns about rising inflationary pressure.

Today’ s payrolls report has seen the greenback lose some ground on its gains this week, as attention now turns to next week’s US CPI numbers, which could see prices rise above 7% and to levels last seen in 1982.  

The Australian dollar has been among this week’s biggest loser in a sign perhaps that markets are concerned that higher US rates might act as a brake on global economic growth for this year. As a net exporter of global raw materials this makes the Australian dollar vulnerable to any concerns about the economic cycle, while concerns about a China slowdown are also weighing given China’s determination to adopt a zero-Covid strategy.

Rising inflation expectations has seen the pound outperform this week, helping to push it to a seven-week high against the US dollar as bets increase that the Bank of England could well hike rates again in the coming weeks. UK company inflation expectations have been rising, while today Sainsbury's announced it would be giving its staff a 5.3% pay rise, coming into effect in March as the UK’s second biggest supermarket looked to keep its staff.  

Commodities

Crude oil prices have shot higher this week, largely over concern about supply disruption due to unrest in Kazakhstan. With some OPEC+ members already struggling to lift production to meet the new output targets, concern over supply shortfalls has been growing.

The sharp rise in yields this week has taken its toll on the gold price which has slipped back from six-week highs, with the prospect that we could see further declines if upward pressure on interest rate expectations continues to grow.


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