Markets Shrug Off Solid Payrolls

The latest market highlights and our views on the key developments as markets shrug off a marginally disappointing US labour market report; Canada's jobs market bounces back; and November's UK GDP data is eyed today

Previous Day's Market Highlights

US Labour Market - Still Solid

The first jobs day of the year saw a marginally disappointing US labour market report, with the economy adding fewer jobs than expected, and earnings growth unexpectedly softening, in December.

Starting with jobs, the US economy added 145,000 jobs last month, below the expected 164,000, however well within the margin of error. Nonetheless, despite the US economy adding jobs for a record 111th consecutive month, December's gain was the weakest since May 2019.

 

The payrolls report also showed a modest net downward revision of 14,000 to October and November's payrolls figures, which helped to bring the 3-month average of jobs gains down to a still healthy 184,000, the lowest since July. Other trend measures of jobs growth are also declining, with the 12-month payrolls average now standing at 176,000, the lowest level since September 2017.

For 2019 as a whole, the US economy added a total of 2.11mln jobs. While this is significantly below the 2.68mln jobs added in 2018, and represents the lowest number of jobs created since 2011, it is still an impressive figure for a US economy which is 10 years into the present expansion.

Meanwhile, unemployment remained at a 50-year low of 3.5% in December, while underemployment also declined. The U6 rate - which includes workers who are no longer seeking jobs, and part-time workers seeking full-time employment - fell to 6.7%, pointing to continued tightness in the labour market.

However, this tightness is still yet to follow through into significantly higher wages, with earnings growth falling short of expectations last month. Average hourly earnings increased by just 2.9% YoY, the slowest pace since July 2018, while earnings were just 0.1% higher on a month-on-month basis.

 

 

It will be important to watch the trend in earnings growth going forward, with a continued subdued pace set to have a dampening effect on consumer spending. Bearing in mind that the consumer is the primary driver of US economic growth at present, any slowdown in this sector could put the wider economy at risk.

Overall, Friday's data was close to another 'goldilocks' report showing a relatively solid payrolls gain, low unemployment, and a decent pace of earnings growth without posing a significant inflationary threat. Furthermore, the report will likely have little overall impact on the FOMC's monetary policy outlook, partly due to the expected lack of inflationary pressures, and partly due to the ever-increasing role of geopolitical developments in the setting of monetary policy.

Turning to the market reaction, investors largely shrugged off Friday's jobs report, with the data producing little significant surprises in either direction. The dollar ended the day unchanged against a basket of peers, recovering from a brief 30 pip decline against most majors after the data hit.

The reaction in other asset classes was similarly subdued. US equities fell modestly - the benchmark S&P 500 closing 0.3% lower. Treasury yields also recorded a modest fall, indicating increased demand, with 10-year yields falling by 3bps.

 

Canadian Labour Market - Bouncing Back

North of the US border, December's labour market figures were also released from Canada.

Data showed the Canadian jobs market bouncing back from a dismal November, with the economy adding 35,200 jobs as 2019 drew to a close.

The solid gain, however, offsets just under half of the jobs lost last month, indicating that the economy is perhaps not fully out of the woods just yet.

Unemployment also fell, to 5.6%, indicating that labour market conditions remain tight, and that the economy is once again nearing full employment. Unexpectedly, especially given the unemployment figure, wage growth slowed to 3.8% YoY - from 4.4% - however this is still a quicker pace than in other developed economies.

For markets, the solid rebound from November's disappointment reassured investors, and reduced the chances of the BoC taking out policy insurance in the early part of the year. The Canadian dollar ended Friday 0.2% higher as a result.

 

 

 

BoE - Release the Doves

Turning to Threadneedle Street, where someone appears to have released some doves at the Bank of England.

After Governor Carney's dovish comments on Thursday, external MPC member Silvana Tenreyro struck a similar tone on Friday, flagging downside risks to the UK economy.

Tenreyro indicated that she was "edging towards" a near-term rate cut if downside economy risks were to emerge, and that she "expects further below target inflation", supporting her view that stimulus may be required.

If one dovish policymaker wasn't enough, MPC member Gertjan Vlieghe used a weekend FT interview (available here) to outline his view that rate cuts have been a "close call" at recent meetings, and that an "imminent and significant" data improvement is needed to justify waiting longer to cut rates.

While Tenreyro's comments were caveated in a similar manner to Carney's, Vlieghe seems set to vote for a cut at this month's policy meeting, hence a 6-3 vote is likely, with Vlieghe set to join Michael Saunders and Jonathan Haskel, policymakers who have voted in favour of a cut at the previous two meetings.

We now have a divergence on the 9-member Monetary Policy Committee; with external MPC members signalling their openness to looser monetary policy, and internal MPC members seemingly happy to leave rates on hold.

Sterling was a touch softer on Friday after Tenreyro's comments - shedding around 0.25% against both the dollar and euro.

 

Any Other Business

  • G10 FX was largely rangebound on Friday, with the Aussie dollar being the only major mover, adding around 0.6% against its US counterpart, benefitting from continued solid risk sentiment.
  • White House Economic Adviser Larry Kudlow indicated that the phase one US-China trade deal is still on track to be signed on Wednesday, stating that the deal's translation had been "authenticated" and that "everything is completely in place" for the signing ceremony.
  • Oil prices continued their fall on Friday as Middle East supply risks continued to recede. Global benchmark Brent settled 0.7% lower, while US WTI crude was down 0.9%, on track for its worst week since July 2019.
Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1710 1.2081 1.1628 3.75%
GBP/USD 1.3030 1.3514 1.2903 4.52%
EUR/USD 1.1130 1.1239 1.1066 1.54%
GBP/AUD 1.8835 1.9523 1.8635 4.55%
GBP/NZD 1.9600 2.0417 1.9415 4.91%
GBP/CAD 1.7000 1.7794 1.6955 4.72%

Today's Market Highlights

The Day Ahead

A fresh trading week gets underway with a relatively quiet economic calendar today.

The data highlight comes this morning from the UK, in the form of November's GDP figures. The economy is expected to have, once again, stagnated on a month-on-month basis, for the second month running.

The expected stagnation is set to drag the rolling 3-month average of GDP growth lower, with the economy expected to have contracted by 0.1% in the three months to November.

This expected contraction will likely weigh on the pound, and may also raise expectations that the BoE will look to introduce policy stimulus in the near-term.

Elsewhere on today's calendar, market participants will pay close attention to remarks from non-voting FOMC members Rosengren and Bostic, while also looking closely at the BoC's latest quarterly business outlook survey.

 

The Week Ahead - Data

On the data front, inflation releases are the order of the day this week, with the latest CPI prints due from the UK, US and eurozone. All are expected to show a relatively benign pace of price increases, though inflation in the UK is set to remain depressed due to the recent lowering of the energy price cap.

Elsewhere, the health of the US consumer will be in focus, with December's retail sales and January's preliminary consumer sentiment reports due. Retail sales for the crucial Christmas shopping period are also due from the UK, amid ongoing reports of struggles on the High Street.

 

The Week Ahead - Monetary Policy

Looking to the week ahead, monetary policy is likely to remain in focus, despite most G10 central banks remaining likely to leave policy on hold this year.

While no policy decisions are due this week, investors are set to closely examine minutes from the ECB's December meeting as well as the Fed's latest Beige Book for any hints on the policy outlook.

Further hints may come from this week's plethora of speakers, including scheduled remarks from BoJ Governor Kuroda, ECB President Lagarde, and FOMC 'big-hitter' Williams.

 

Anything Else?

  • Fourth quarter earnings season kicks off this week, with all major US banks set to report. Investors will pay close attention to the reports, particularly given last year's rate cuts, after financials were one of the best performing sectors last year.
  • The phase one US-China trade deal is, finally, set to be signed on Wednesday, though focus will quickly switch to talks over a phase two deal, something that will be neither quick nor easy.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP GDP (MoM - Nov) 0.0% 0.0%
9.30am GBP GDP - (3Mo3M - Nov) -0.1% 0.0%
3.30pm CAD BoC Business Outlook Survey (Q4)