Market Insights: Non-Farm Payroll Surprises, Tech Resilience, and Central Bank Showdowns ??????????

December 11, 2023

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In the latest #TradewithDave update we look back at last week’s big events and consider what’s happening in the week beginning 11 December.??

?? Non-Farm Payrolls?????

On Friday we got the latest update on Non-Farm Payrolls for the month of November:

• Headline Payrolls rose by 199,000 – above the 184,000 expected.??
• The Unemployment Rate fell to 3.7%, from 3.9% previously.??
• Average Hourly Earnings rose by 0.4% in November, above the 0.3% expected, and 0.2% previously. This raises inflation concerns.?
• Stock indices sold off sharply, along with precious metals, while the US dollar soared as traders rolled back their rate cut bets for 2024.??

Economists who forecast the need for high unemployment to rein in inflation are now "eating their words," according to US Treasury Secretary Janet Yellen.?Last week she noted: "We're not seeing the usual signs of a weakening labour market that would make you fear a recession."??

There has been some evidence that the tight labour market is loosening up a bit.?Fed Chair Jerome Powell has stated that the US was on track to get inflation down to 2% without incurring large job losses.?Friday's better-than-expected Non-Farm Payroll report backs that up.??

While one set of data doesn’t set a trend, the strong payroll numbers suggest that the Fed is right when it says the market is overplaying its hand in expecting dramatic rate cuts next year.?

Check out the US 500…?

?? NASDAQ 100 breaks above resistance?????

Last week was a mixed one for US stock indices. After a strong November, there’s been a noticeable drop in upside momentum:

• Despite this, the NASDAQ 100 poked its nose back above resistance around 16,000?
• Both the NASDAQ 100 and Dow Jones are back to levels last seen at the beginning of 2022, and close to their all-time highs.??
• Meanwhile, the German DAX has made a fresh record high, despite a disappointing economic outlook for Germany and the Eurozone.?
• But the S&P 500 has been unable to cap its July high of 4,607 and this has become a significant level of resistance.??

Is this simply a period of healthy consolidation ahead of a rally which could take us into the New Year??Or are the major stock indices signalling that the high is in for 2023??

Check out the US Tech 100…?

?? Wild week for gold and silver??????

What a week it’s been for gold and silver. As of last Friday, we’ve seen a high-low move since the previous Sunday night of 6.3% and 7.8% respectively.??

Around two weeks ago, gold finally burst above a band of resistance between $2,000 and $2,010.?It came back and tested that upper level on Tuesday, and that area is holding as support.?This is offering some encouragement to the bulls who are hoping for more sustained gains going into 2024.??

However, silver bulls are having to deal with a far greater amount of pain.?Having surged above resistance around $24, and taking gold with it, silver went on to hit its best levels since May this year, just short of $26 per ounce.??But like Icarus it fell almost as quickly as it climbed.??

At the time of writing, it is back below $24, and the bulls will be hoping that, unlike Icarus, it may be down, but it’s not out.?Gold appears to be helping the bullish cause, and if it can hold above $2,000 and rally, then it could be the one to lead silver higher.?But if gold falters and drops back below $2,000, then things could start to look grim.?

Check out gold...

??? Looking ahead?to next week ??

?? US Federal Reserve??????

This week sees three major central banks hold monetary policy meetings.??

• Things kick off on Wednesday evening when the US Federal Reserve’s Federal Open Market Committee (FOMC) announces its rate decision, along with its latest statement and quarterly Summary of Economic Projections (SEP).??
• Fed Chair Jerome Powell will then hold a press conference.??

According to the CME’s FedWatch Tool which uses trades in the fed funds futures market to predict Fed rate hikes, there’s no expectation the US central bank will move rates at this meeting.?They will remain in a band of 5.25-5.50%, which is where they have been since July this year, and at their highest level since January 2001.?So, analysts will focus on the accompanying statement and SEP.??

The SEP allows individual members of the FOMC to provide their forecasts for inflation, the fed funds rate, GDP and unemployment for next year and beyond.?The fed funds forecast comes in the form of a ‘Dot Plot’ and this is where we’ll see what the FOMC members are predicting for future interest rate movements.??

Now, the Fed has repeatedly warned market participants not to get too carried away over the prospect for rate cuts next year, warning that inflation remains too high.?But looking again at the CME’s FedWatch Tool, which is after all where the real money goes, the market expects the first rate cut to come in March next year.?

It also predicts that the Fed will cut rates by a total of 125 basis points to take fed funds down to an upper limit of 4.25%.?The Fed maintains that this forecast is far too dovish, and something has got to give.?The question is how entrenched the FOMC, and Jerome Powell, sound on Wednesday evening. It could get quite wild.?

??? The Bank of England (BoE) and European Central Bank (ECB)??? ??

Similarly, to the Federal Reserve, both the BoE and ECB are expected to keep their key interest rates unchanged at 5.25% and 4.50% respectively.?Both central banks have noted that inflation remains above target, roughly 2% for both, although inflation across the Eurozone appears to be falling faster than in the UK.??

Last week, we heard from the ECB’s Isabel Schnabel.??

Usually hawkish, Ms Schnabel pointed to the ‘remarkable’ fall in Eurozone inflation which suggested that the next move in interest rates should be down.??

The markets are already pricing in a 25-basis point cut in March with many more to come in 2024.?In fact, Deutsche Bank expect the ECB to cut rates by 150 basis points, taking their headline rate down to 3% by the end of next year.?Much of this dovishness is due to the poor economic outlook for the region where growth rates are slowing, led by Germany.?

???? Oil under pressure?????

It was a dismal week for crude oil, although both WTI and Brent managed to rally a touch on Thursday and built on these gains on Friday.?Saudi Arabia and Russia called on its fellow members of OPEC+ to join them in cutting production.??

• On Thursday, the front-month WTI contract broke below $70 to hit its lowest level in over five months.??
• That marked a drop of 26% from the September high.??
• The oil market has been dominated by predictions of weakening demand.??
• Fears of a slowdown in global growth have been building as we approach the year-end.??

While there’s plenty of evidence of slowing economic growth for China, the Eurozone (driven by Germany), Japan (an overnight downward revision GDP) and the UK, the jury is still out when it comes to the US.?We’ve just seen an upward revision to the US’s Q3 GDP number to +5.2% from 4.9%. How could that possibly be turned around into a recession in 2024???There were so many voices forecasting a US recession this year, and all were widely off the mark.??And yet, it could happen, and if it did it would explain why the market is pricing in rate cuts of 125 basis points in 2024, despite the Fed warning not to get carried away.?

Check out crude oil…?

?? The economic calendar??????

Following on from Friday’s Non-Farm Payroll release, things continue to heat up this week.

• We start off quietly with only a US bond auction and a speech from Reserve Bank of Australia Governor Michele Bullock as potentially market-moving events on Monday.
• On Tuesday we have the latest update on UK employment which has been steady since the summer, but with a slight upside bias.
• There’s also the ZEW Economic Sentiment surveys for both the Eurozone and Germany. The surveys are considered to be leading indicators of economic health.
• Then we have US inflation data in the form of the CPI (Consumer Price Index). Headline CPI now matches the lows last seen in August this year, just prior to a blip higher. At +3.2% year-on-year, we’re back to levels previously hit in April 2021.
• On Wednesday we have US PPI, which looks at inflation in the wholesale sector. Again, this is considered a leading data point as what happens to wholesalers then gets pushed out to consumers. All this inflation data comes ahead of the Federal Reserve’s final monetary policy meeting of the year (see above).
• On Thursday we have Australian Unemployment, rate decisions from the Swiss National Bank, Bank of England and European Central Bank. Later, we have US Retail Sales, Business Inventories and weekly Unemployment Claims.
• Friday sees the release of Chinese Industrial Production, Retail Sales and Fixed Asset Investment. Then we have Manufacturing and Services PMIs from France, Germany, the Eurozone, the UK and later, the US. All-in-all, the most important week for economic events ahead of the holiday season.??

This week’s key Q3 earnings????

?? Monday:??

Oracle, Casey’s General Stores, Blue Bird Corp.?

?? Tuesday:?

Value Line, Ambipar Emergency Response.?

?? Wednesday:?

Adobe, Nordson Corp, ABM Industries.?

?? Thursday:?

Costco, Lennar?

?? Friday:?

Darden Restaurants, Jabil, Uranium Energy.??

*Figures correct as of December 11, 2023.

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