The Job market remains strong

Thoughts of the Day

The US Unemployment rate remains low at 3.7% despite expectations of it ticking higher to 3.8%. The US jobs market remains resilient and that will keep the US Federal Reserve on its toes as the officials do not want to declare victory on inflation prematurely.

As long as inflation continues to fall towards the 2% target, they are likely to keep interest rates unchanged for now.

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Week Ahead

Monday: –

Tuesday: Euro area unemployment rate expected to remain at 6.5% in November.

Wednesday: – 

Thursday: The US Consumer Price Index is expected to show that prices rose 3.2% Year-on-Year, up from 3.1% in November. Friday: Inflation data from China will be released (no expectations given).

The US Producer Price Index is expected to show that prices rose 1.3% Year-on-Year, up from 0.9% in November.

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What Happened Yesterday

Market Movements as of New York Close 5 Jan 2023 (7 Jan for Crypto)
  • Fedspeak:
    Logan (non-voter, known hawk): “If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made. In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet.”
    Barkin (current voter, slight hawk): “We’re still at a point where inflation is over our target and unemployment is arguably at or below levels consistent with maximum employment.”
    (Both Logan and Barkin are sounding as hawkish as they did previously.)
  • The Euro area inflation showed that prices rose 2.9% YoY (vs 3% expected) compared to 2.4% previously. The core index showed a 3.4% rise in prices as expected vs 3.6% previously.
  • Canada labour: Unemployment rate remained at 5.8% (vs 5.9% expected). Employment change showed +0.1k jobs were added to the economy vs 13.5k expected and 24.9k previously.
  • US Non Farm Payrolls: 216k jobs added to the economy vs 1670k jobs expected and 173k previously (revised down from 199k). Unemployment rate remained at 3.7% vs a rise to 3.8% expected. Average hourly earnings rose 4.1% YoY compared to 4% previously and expectations of 3.9%. The labour market remains on the stronger side, and that could be what prompted some hawkish comments from the Fed officials.
  • The US ISM Services PMI came in weaker than expected at 50.6 vs 52.6 expected and 52.7 previously.
  • The US Treasury Yield curve inversion narrowed to 0.35% as the US 2-year bond yield rose +0.02% to 4.40% while the 10-year bond yield rose +0.06% to 4.05%.
  • The US stock futures drifted slightly lower through the Asian and London trading sessions with the S&P 500 down -0.05% before the New York session began.
  • The US stock market opened almost unchanged from Thursday. It then made multiple attempts to move higher through the New York session with the services PMI coming in weaker than expected. However, the attempts were met with fierce resistance following hawkish comments from Fed officials Logan and Barkin. Consequently, the S&P 500 closed merely +0.18% higher on the day (high: +0.47%, low: -0.14%), the Dow Jones eked out a gain of +0.07% (high: +0.49%, low: -0.31%) while the Nasdaq rose +0.15% (high: +0.82%, low: -0.20%). 
  • The crypto market traded slightly lower as the market awaits the decision from the SEC.
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Headlines & Market Impact

China to sanction 5 U.S. manufacturers over arms sales to Taiwan

Notable Snippet: China will sanction five U.S. military manufacturers in response to the latest round of U.S. arms sales to Taiwan, a foreign ministry spokesperson said on Sunday.

U.S. arms sales to Taiwan are a frequent source of tension between Washington and Beijing. China views democratically governed Taiwan as its territory, a claim Taiwan’s government rejects.

The sanctions come ahead of Taiwan’s Jan. 13 presidential and parliamentary elections, which China has cast as a choice between war and peace.

The U.S. State Department last month approved a $300 million sale of equipment to help maintain Taiwan’s tactical information systems.

The spokesperson said in a statement the recent arms sales “seriously undermine China’s sovereignty and security in

The companies that will be sanctioned are BAE Systems Land and Armaments, Alliant Techsystems Operations, AeroVironment, Viasat and Data Link Solutions.

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Israel signals it has wrapped up major combat in northern Gaza as the war enters its fourth month

Notable Snippet: The Israeli military signalled that it has wrapped up major combat in northern Gaza, saying it has completed dismantling Hamas’ military infrastructure there, as the war against the militant group entered its fourth month Sunday.

Israel did not address troop deployments in northern Gaza going forward. Military spokesman Rear Adm. Daniel Hagari said late Saturday that forces would focus on the central and southern parts of the territory and strengthen defences along the Israel-Gaza border fence.

The announcement came ahead of a visit to Israel by U.S. Secretary of State Antony Blinken, who on Sunday was in Qatar, a key mediator. Biden administration officials have urged Israel to wind down its blistering air and ground offensive in Gaza and shift to more targeted attacks against Hamas leaders.

In addition to U.S. appeals for scaling back high-intensity combat, Blinken on his fourth Mideast trip in three months is calling for more aid to reach Gaza and urging Israel’s leaders to come up with a post-war vision for the besieged territory.

An escalation of cross-border fighting between Israel and Lebanon’s Hezbollah has complicated the U.S. push to prevent a regional conflict. Hezbollah described Saturday’s rockets as an “initial response” to the targeted killing of a top Hamas leader in a Hezbollah stronghold in Beirut last week, presumed to have been carried out by Israel.

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Oil slips as higher OPEC supply, Saudi price cuts offset Mideast worries

Notable Snippet: Offsetting the upward pressure on prices from geopolitical concerns, output from the Organization of the Petroleum Exporting Countries (OPEC) rose 70,000 barrels per day (bpd) in December to 27.88 million bpd, according to a Reuters survey.

Rising supply and competition with rival producers prompted Saudi Arabia on Sunday to cut the February official selling price (OSP) of its flagship Arab Light crude to Asia to the lowest level in 27 months.

“If we were just to focus on the fundamentals including, higher inventories, higher OPEC/non-OPEC production, and a lower than expected Saudi OSP, it would be impossible to be anything other than bearish crude oil,” IG analyst Tony Sycamore said.

“However, that doesn’t take into account the fact that geopolitical tensions in the Middle East are undeniably rising again which will mean limited downside.”

In the U.S., oil drilling rigs were up by one at 501 last week, Baker Hughes said in its weekly report.

JPMorgan forecasted 26 oil rigs to be added this year, most of them in the Permian during the first half of the year.

“The timing of drilling is paramount, as rig additions at the start of the year will contribute to 2H24 production growth,” the bank’s analysts said in a note.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord