In Focus: US Labour Market, Oil, Equities and Eurozone Data

US Labour Market

Following market reaction to yesterday’s ADP employment figures, today markets will be keeping a close eye on non-farm payrolls to gain some insight into the health of the labour market and the extent to which it may be compounding inflationary pressures on the world’s largest economy.

??>ADP Surpasses Expectations

Yesterday, ADP employment figures well surpassed expectations of 150,000 as they hit 235,000 (delivering a deviation of 0.99). The growth in the number of new jobs in consumer-facing service industries was a key factor behind the overall print while the construction sector saw some 55,000 more payrolls. Against the trend was the manufacturing sector which saw losses of 5,000. This comes as manufacturing further contracted over December as PMI slipped to 46.2pts.

??>Non-farms

Concerning non-farms, the general market consensus is expecting a print of 200,000 which would represent a considerable slowdown from last month’s 263,000 figure. Given that much of the US’ inflationary pressure is being driven by a tight labour market, a higher-than-expected print could give markets further credence that the Fed will raise rates by a further 50bpts, as money markets currently price in some 36bpts for the next FOMC.

Earlier last year, Powell suggested that Non-farms would need to ease to some 100,000 to remain in line with population growth while not overly impacting inflationary pressures. Thus, even a relatively softer-than-expected print would still suggest considerable inflationary pressures being driven by the tight labour market.

Today’s non-farms comes just days after the release of the Fed’s December minutes which stated “the labor [sic] market had remained very tight, with the unemployment rate near a historically low level, robust payroll gains, a high level of job vacancies, and elevated nominal wage growth”. As such, given the persistence of inflation, they stated that “a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 per cent, which was likely to take some time”.

Markets Await Eurozone HICP and Retail Sales:

Markets will be keeping a close eye on data out of the Eurozone today, given the release of HICP figures and Eurozone retail sales which are both published at 10:00.

In terms of HICP figures, the general market consensus is expecting a print of 5% on a core basis and 9.7% when accounting for energy, food, and alcohol. If realised, the core figure would put it in line with last month’s print of 5%, though the 9.7% figure for headline HICP would indicate a 0.4 percentage point drop from last month. This comes as wholesale energy prices in the Eurozone have seen a sustained decline given warm weather, above-average gas storage levels and strong levels of wind power generation which has thus taken some of the inflationary sting out of the single market.

Regarding retail sales, the general market consensus is predicting a contraction of 3.3% for December on an annualised basis. This would mark a considerable contraction from last months print which saw retail sales fall 2.7% on an annualised basis, as consumer spending dries given the increased cost of living. Of course, given the implications that higher consumer spending has on inflation and rates, markets will be keeping a particularly close eye on today’s print.

When looking at last month’s eurozone retail turnover print (which detailed the month of October), Austria recorded the largest contraction a 4.6% while Germany and France saw falls of 2.8% and 2.7% respectively. Elsewhere, Spain was the clear anomaly, recording growth of 0.4%.

Oil Rises As Inventories Dip

WTI Crude Futures have risen around half-a-percent in the last 24-hour session following data which showed US inventory levels declining considerably. Nevertheless, higher covid cases in China and prevailing uncertainty around the country’s reopening has seen something of a sell-off this week, with crude falling from around $81dbp to below $73dbp over the course of the week.

Investors are also weighing on the prospect of recessions throughout 2023 for a great number of economies around the world, leading to a slowdown in demand. Meanwhile, earlier this week Russia announced an oil embargo on any country which adopt the G7s’s price cap, hence increasing the prospect of supply side strains around the world.??

Equities Slip Following Fed Minutes and ADP Print

Yesterday saw further pressure on global equities following the hawkish implications of the Fed’s Minutes and the US higher-than-expected ADP Print. The MSCI All-World index saw a 0.8% contraction, while the S&P fell 1.2%. Similarly, the Dow Jones Industrial Average fell 1%, while the Nasdaq dropped 1.5%. In Europe, the STOXX 600 closed down 0.2% as softer inflation prints in Germany, France and Spain eased investors’ fears of a more aggressive rate hike path.