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US wage growth weighs on stocks, yields spike

Federal Reserve and US dollar notes

Having been dragged lower yesterday by the big tech induced sell-off in US equity markets, European stocks initially opened higher in the wake of last night’s after-hours surge in US markets.

Europe

These gains haven’t been able to endure, and in the face of rising European yields, we’ve slipped sharply lower as the day has progressed. Investors appear to be mulling the prospect of higher inflation, as well as rates, and their cumulative effect on growth prospects across the board in the coming months.

This weakness continued in the wake of this afternoon’s US payrolls report, which not only posted an upside beat, but also saw wage growth surge to 5.7%, from 4.9%. Earlier this week Fed officials spent a good deal of time dialling back market expectations that the Fed would raise rates by 50bps in March, and until last night’s big falls did a fairly decent job. Today’s US payrolls and wages numbers have put the prospect of a 50bps rate rise firmly back on the table.

The FTSE 100 has slipped back but is performing better relative to its European peers, due to outperformance from the energy sector, helped by crude oil prices pushing up to another seven-year high above $93 a barrel. This in turn has helped push BP’s share price above 400p for the first time since March 2020, while Shell has similarly moved higher and above 2,000p.  

On the downside, concerns about the higher cost of living are hitting retail stocks, with the likes of Kingfisher, and Primark owner Associated British Foods and B&M European Retail under pressure. Banks and housebuilders have also slipped back on concern about mortgage demand as rates go up, with Lloyds, NatWest Group and Taylor Wimpey sinking back.

US

US markets opened flat after the non-farm payrolls unexpectedly saw a big jump in hiring in January, to 467,000, well above expectations of 125,000, while the December number was revised higher from 199,000 to 510,000, as the US economy added over 900,000 new jobs over the Christmas and new year period.

This was a huge upside surprise, coming on the back of widespread pessimism that we would see a good number from both Fed and government officials, and merely serves to reinforce how difficult it is to read what is happening in the US labour market after this week’s 301,000 decline in the ADP report.

The unemployment rate unexpectedly rose to 4%, while more encouragingly the participation rate rose from 61.9% to 62.2%, indicating that workers were returning to the workforce. This improvement in participation is likely to gain traction in the coming months given another sharp rise in wage growth which jumped sharply from 4.9% to 5.7% in January. This was a big surprise and puts the prospect of a 50bps hike in the Fed Funds rate in March back on the table, only days after a number of Fed policymakers poured cold water on that prospect.

The shift in expectations has been reflected in a big surge in US 2-year yields soon after today’s payrolls release from 1.22% to just above 1.29%. This rise in yields is weighing on most of the US stock market, with the exception of the Nasdaq 100 which is being buoyed by the surge in Amazon’s share price, which has rebounded strongly and more than reversing yesterday’s large drop.

Amazon reported a bigger than expected profit for Q4, largely as a result of its investment in Rivian. Net income came in at $14.3bn, largely due to an $11.8bn tax valuation gain from its investment in the electric car maker. As far as revenues are concerned, these came in at $137.4bn, which was in line with expectations of a number between $130bn and $140bn. Its cloud business AWS posted revenue of $17.8bn, a 40% increase on last year, as well as beating the $16.1bn in Q3, and a continuation of the quarter-on-quarter improvements seen throughout the year.  

Its guidance for Q1 was fairly weak, although higher than Q1 last year, with net sales expected to come in between $112bn and $117bn, below market expectations of $120bn, while operating income is set to come in between $3bn and $6bn compared to $9bn a year ago. Given that guidance you would have expected a negative reaction, however the decision to announce a $20 a year, or $2 a month price hike in Amazon Prime on its US members, appears to have assuaged concerns about the company maintaining its margins in the face of higher costs. In Q4, Amazon hired 140,000 extra staff, while over the year operating expenses have risen from $363bn in 2020, to $445bn. The big concern over a price hike like this is that they might experience some churn, however it appears that management are betting that a new Lord of the Rings series, and streaming rights to Thursday night football could tip the balance in their favour.

Snap shares underwent a similar surge, having fallen 23.5% yesterday, on concerns over its own earnings numbers in the wake of the Meta meltdown, and opened over 50% higher after posting its first ever quarterly profit, and a 42% rise in sales of $1.3bn.

FX

Despite today’s better-than-expected payrolls report, the US dollar still looks on course for its biggest one-week slide since March 2020, although it has offered it a brief respite.  

Commodities

Brent crude prices have continued to push higher, above $93 a barrel, and its seventh successive weekly gain. US WTI prices have also been driving higher as cold weather in the US helps to underpin prices, over concerns over shutdowns in the Permian basin. US gasoline prices are also approaching their highest levels in eight years. This week’s weakness in the US dollar isn’t helping either, as the prospect of $100 oil gets ever closer.  


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