Solid US Jobs Report Cools Rate Cut Speculation

For the week ending 8 December 2023

As of midday Friday, global equities were modestly lower on the week as expectations of quick rate cuts from the US Federal Reserve dimmed after firmer US employment data. The yield on the US 10-year Treasury note fell slightly to 4.22% from 4.26% a week ago but looks set to end well above the intraweek low of 4.10%. The price of a barrel of West Texas Intermediate crude oil fell nearly $5 to $70.70 this week while volatility, as measured by the Cboe Volatility Index (VIX), was steady at 12.8.

MACRO NEWS

US payrolls beat expectations

Job gains in the United States were slightly stronger than expected in November as the economy added 199,000 hires and the unemployment rate dipped to 3.7% from October’s 3.9%. Average hourly earnings ticked up 0.4% on the month while holding steady at 4% year over year. The relatively upbeat data helped cool speculation that the Fed will begin trimming interest rates in the first half of next year and pushed bond yields up to about 4.22% after they traded as low as 4.10% earlier in the week.

China’s credit rating on watch

Moody’s cut China’s debt outlook to negative while retaining its A1 rating for the country’s sovereign bonds, saying that China’s use of fiscal stimulus to support local governments and its continued property downturn pose risks to the nation’s economy. This was the first ratings adjustment by Moody’s since 2017. China’s finance ministry pushed back against the action, saying the impact of the property downturn is well under control. Moody’s put Hong Kong, Macau and many of China’s state-owned firms and banks on downgrade warnings on Wednesday following the previous day’s action on the mainland government’s credit rating. On Friday, China’s Politburo pledged to strengthen fiscal and monetary measures, bolstering efforts to stabilize growth.

BOE warns on US equity valuations, private credit

In its financial stability report, released Wednesday, the Bank of England warned that in the context of rising long-term interest rates, the excess cyclically adjusted price-to-earnings CAPE yield on US equities has continued to fall and is approaching its lowest level since around the time of the dot-com crash in the early 2000s. (The CAPE yield is a measure of the excess return that investors expect from equities relative to government bond yields). That the yield is falling could imply that US equity valuations have become more stretched, the central bank said. The BOE also said that private credit and leveraged lending are particularly vulnerable to sharp revaluations given that companies with such financing are in a tricky spot because of the sharp increase in interest rates and the floating rate nature of those debt instruments. 

BOJ setting stage for NIRP exit

Several Bank of Japan policymakers, including Governor Kazuo Ueda, helped lay the groundwork this week for the central bank to eventually abandon its negative interest rate policy. While most analysts expect such a move will wait until sometime in the first half of 2024, markets have priced in a nontrivial 30% probability of a hike from -0.1% to zero as early as the 19 December BOJ rate-setting meeting. The yen strengthened nearly 4% against the dollar on Thursday before stabilizing.

QUICK HITS

Easing inflation concerns among US consumers helped sent the University of Michigan Consumer Sentiment index up to 69.4 in the preliminary December reading from 61.3 in November.

Assets in US money market funds reached an all-time high of $5.9 trillion in the week ending December 6, according to the Investment Company Institute.

German industrial production fell 0.4% in October to the lowest level since August 2020.

Eurozone Q3 GDP was unrevised at -0.1% quarter over quarter and unchanged year over year.

Freddie Mac said Thursday that the rate on a 30-year fixed rate mortgage has fallen to 7.03% from a peak of nearly 8% at the end of October.  

Russian President Vladimir Putin announced Friday that he will run for a fifth term as president of the Russian Federation.

Italy has informed China that it will exit the Belt and Road Initiative.

A court in Hong Kong gave Chinese property developer Evergrande until the end of next month to come up with a restructuring plan to avoid liquidation.

According to the Pew Research Center, between 2019 and 2021 the median household net worth in the US rose 30% to $166,900 amid government stimulus and rising asset prices.

On Tuesday, the Reserve Bank of Australia held its policy rate steady at 4.35%.

The eurozone and the United Kingdom both saw their composite purchasing managers’ indices tick higher in November. The eurozone composite ticked up to 47.6 in November from 46.5 in October while improvement in the UK services sector lifted the country’s composite to 50.7 from 48.7. In the United States, the ISM services index rose to 52.7 from 51.8.

The price of gold hit a record $2135.40 an ounce in early Asian trading Monday morning before quickly shedding its gains.

In the US, October JOLTS job openings declined more than expected to 8.7 million from 9.35 million in September. That was the lowest level of job openings since early 2021 and brought the ratio of openings per unemployed worker to 1.3, close to the prepandemic level of 1.2.

US Q3 nonfarm productivity was revised up to 5.2% from an initial 4.7% reading as unit labor costs were revised to -1.2% from -0.8%. If sustained, increased productivity helps raise a country’s standard of living.

A harshly critical report published Wednesday in the Wall Street Journal suggested that China’s GDP growth is most likely less than half the 5% to 6% target China set for 2023.

The Biden administration approved an additional $4.8 billion in student loan debt forgiveness.

Deposed Speaker of the US House of Representatives Kevin McCarthy announced that he will retire from Congress at the end of the year, leaving the GOP with only a two-vote House majority. 

Chinese exports rose 0.5% in November, the first rise in seven months.

The Biden administration on Thursday threatened to seize the patents of pricey prescription drugs. According to Bloomberg, the administration unveiled a new framework under which US agencies may use so-called march-in rights. This will allow them to grant patents to rival pharma companies if a drug developed with the help of taxpayer money becomes prohibitively expensive.

The expectation of European Central Bank rate cuts in early 2024 helped push Germany’s DAX index to record highs this week.