Markets
It was a big day datawise, but less so marketwise. Let’s start with the numbers. EMU headline inflation fell as expected more than forecast following earlier national releases: down 0.3% M/M with the Y/Y-reading sliding from 10.1% to 9.2%. It’s the first single digit reading since August. The monthly drop was almost solely due to the fall in German energy prices (fiscal support to pay for customer’s natural gas bills). When stripping out the volatile energy and food components, core inflation extended its upward trend: from 5% Y/Y in November to a new EMU record high of 5.2% in December. It strengthens the case for ECB policy normalization as core/services inflation is the needle in the ECB (and Fed) compass. On other side of the Atlantic, US payrolls beat consensus (223k vs 203k). However, taking into account a 28k downward revision to the previous two months’ numbers, brings the report close to expectations. Average hourly earnings rose less than expected (0.3% M/M and 4.6% Y/Y) and were the item that triggered a market response (see below). The separate household survey was extremely strong with employment rising by 717k and unemployment falling by 278k. It results in a decline of the unemployment rate from 3.7% to 3.5%, matching the cycle and multidecade low. The labour force participation rate increased from 62.1% to 62.3%. Apart from March 2022 (62.4%), it’s the highest level since the start of the Covid pandemic early 2020.
Turning to markets: they first ignored the EMU CPI numbers and next zoomed in on lower-than-expected US wage growth instead of labour market strength. The reasoning is simple, but shortsighted. Fed Chair Powell more than once stressed the risk of wage inflation feeding into core services inflation if the labour market stays strong. This would warrant an even more hawkish course by the Fed. Currently, the market is split between a 25 bps and a 50 bps rate hike early February. We look for more clues in upcoming speeches by Fed governors. Up until now, most of them struck a hawkish (but ignored) tone. We side with another 50 bps hike. EUR/USD drifted below 1.05 for the first time since early December ahead of the payrolls report, but rebounded to 1.0530 afterwards. The US yield curve turns less inverse with yields losing up to 4.9 bps at the front end of the curve (2-yr). In Germany, it’s the very long end of the curve which outperforms with the 30-yr yield down 5.8 bps on the day. US stock markets open with small gains to the tune of 0.5-1%.
News Headlines
Canadian payrolls crushed forecasts. Job growth amounted to 104k in December, far more than the 5k projected. Full-time employment carried the bulk (84.5k). The strong increase unexpectedly lowered the unemployment rate from 5.1% to 5%, only one tenth of a percent above the record low seen mid last year. This was the case even as the participation rate nudged higher from 64.8% to 65%. A tight Canadian labour market results in lofty wage increases. Though slower than in November, wages grew at another 5%+ pace. The Bank of Canada in December lifted policy rates by 50 bps. At 4.25% and considering the already delivered monetary tightening (400 bps), the BoC’s stance turned more neutral and data-dependent. Markets before the publication discounted a 65% chance for a 25 bps hike later this month. That is now 85%. Canadian swap yields extend an earlier rise, adding up to 5 bps at the front. USD/CAD reversed course and went from 1.366 to 1.354 with a touch of USD weakness helping the move as well.
South Africa’s ruling party, the ANC, wants to broaden the central bank’s (SARB) mandate so that it can play a bigger role in supporting the economy. The SARB pursues an inflation-targeting strategy aiming for balanced and sustainable growth. It has repeatedly said that current obstacles to higher growth are outside the scope of monetary policy. The proposal is still under discussion within the ANC, after which it will be sent to Parliament, the ANC chairman said. As it may require a constitutional amendment to the mandate, the vote would need approval from two thirds of lawmakers. The ANC only controls 58%. South Africa’s rand dipped after the story. EUR/ZAR is trading around 18.2, up from the low 18 area this morning. USD/ZAR rose from 17.17 to 17.30.
