US consumer spending dipped in December

• US consumer spending which accounts for more than two-thirds of US economic activity, dropped 0.6% m/m in December, suggesting a cooling economy heading into the new year amid supply chain challenges and rising Covid-19 infections. Consumer spending also likely dropped in December as a result of Americans starting their holiday shopping earlier than normal due to supply shortages fears. Spending on goods fell 2.6% m/m, led by automobiles, while spend on services gained 0.5% m/m, lifted by healthcare. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components, rose 0.5% m/m after a similar gain in November. The core PCE price index accelerated 4.9% y/y in December up from 4.7% in November, the fastest growth since September 1983.
• US Labor Department data on Friday showed wage inflation building up amid an acute shortage of workers.  The Employment Cost Index, the broadest measure of labor costs, rose 1.0% q/q in Q4 2021 after increasing 1.3% q/q in Q3 2021. Labor costs surged 4.0% y/y in Q4 2021, the largest rise since Q4 2001, after increasing 3.7% y/y in Q3 2021. Wages and salaries rose 1.1% q/q in Q4 2021 after increasing 1.5% q/q in Q3 2021. They were up 4.5% y/y, the largest increase since Q2 1990. Private industry wages rose 1.2% q/q for Q4 2021 and shot up 5.0% y/y, the most since Q1 1984. Benefits for all workers rose 0.9% q/q In Q4 2021 after a similar gain in Q3 2021.
• US consumer sentiment soured in January with The University of Michigan's Consumer Sentiment Index falling to 67.2 - the lowest since November 2011 - from a final December reading 70. Concerns about high inflation and the degree to which it is eating into incomes likely drove the reading lower.  Readings of current conditions and future expectations fell from both the month before and their preliminary levels from two weeks ago.
• PMI data from China showed further softening in business condition.  The manufacturing PMI slipped to 50.1 in January from 50.3 in December while the services PMI fell to 51.1 from 52.7 in November. The Caixin China PMI, which surveys smaller businesses, showed the manufacturing sector slip into contraction in January, with the PMI falling to 49.1 from 50.9 in December. The run-up to Chinese New Year holidays may have weighed on activity, although the indices are seasonally adjusted, as did Covid-19 related restrictions.

Today’s Economic Data and Events

• No key data or events today

Fixed Income

• Even amid the hawkish tone the markets took from the January FOMC, US Treasury markets closed last week mixed. A rise in risk assets on Friday helped and perhaps less fear that higher rates would derail growth this year helped shift flows back to treasury markets. On the week the 2yr UST yield added 16bps in anticipation of a higher rate trajectory while the 10yr yield closed barely higher on the week.
• Elsewhere bonds generally remained offered with a broad index of European bonds falling by 0.3% last week while high-yield and emerging market bond indices fell considerably. In local currency terms, Turkish bonds fell heavily with yields on 10yr government bonds up more than 80bps to 22.25% while South African bonds also sank with the SARB raising rates. Yields on South African local currency 10yr bonds gained almost 16bps to 9.846%. In Indian yields added nearly 13bps to 6.754%.

FX

• The US dollar had its strongest week since June 2021 last week as markets looked to the Fed hiking rates from March onward. The broad DXY index added 1.7% last week, keeping the index up 1.7% since the start of the year. EURUSD provided much of the gains for the dollar with the single currency falling by 1.5% last week to 1.1151. USDJPY rallied by 1.4% to 115.26 as yield differentials look set to widen considerably.
• GBPUSD managed a more respectable performance against the dollar, only losing 1.1% to 1.3401 even amid expectations that the Bank of England could again raise rates at its February meeting. In commodity currencies USDCAD rose 1.5% to 1.277 as the Bank of Canada failed to take advantage of the room markets gave it to hike rates while AUDUSD fell 2.7% to 0.6988 and NZDUSD was off by 2.5% to 0.6548.

Equities

• US equity markets ended the week on a positive note, with all three major benchmark indices paring back the losses seen earlier in the week. The NASDAQ added 3.1% to close flat w/w, the Dow Jones added 1.7% to close up 1.3% w/w and the S&P 500 added 2.4% to end up 0.8% w/w. All remain down since the start of the year, however.
• European equity markets remained under pressure on Friday amidst mixed GDP results from France and Germany. Further losses on Friday saw the CAC drop -1.5% w/w and the DAX -1.8%. The FTSE 100’s losses were a more muted -0.4%.
• Locally, the DFM added 0.3% w/w and the ADX closed 0.7% higher.

Commodities

• Oil prices settled at their highest levels since 2014 last week as markets watch the febrile geopolitical environment in Eastern Europe for indications of supply disruptions. Brent futures added 2.4% to settle at USD 90.03/b at the end of last week and are up above USD 91/b in early trade today. WTI added 2% to close at USD 86.82/b and have moved above USD 88/b at the start of trading.
• Markets will be watching the OPEC+ meeting this week where we expect they will agree to increase production by another 400k b/d for March. However, hitting that target may prove a challenge given that several countries have considerably underperformed their targets recently as lack of investment weighs on their ability to increase production at short notice.
• In the US, exploration and production companies added another four oil focused rigs last week, taking the total drilling count to 495 last week.

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