US nonfarm payrolls surprise to the upside

The US labour market continues to show signs of strength despite rising rates and a weakening global outlook. Nonfarm payrolls surprised on the upside, rising by 263K in November, with modest upward revisions to both the September and October figures. The largest gains were seen in leisure and hospitality, healthcare and local government. Despite news reports of job losses amongst tech firms, the information technology sector still managed to gain 19,000 jobs on the month.

A growing concern for policy makers may be the continued divergence between the strength in the payroll survey and weakness in the household survey. The household survey, in contrast to the payroll survey, saw a 138K fall in employment. This fall in employment was matched by a slightly larger fall in the labour force, to prevent the unemployment rate from rising above 3.7%. The drop-off in the labour force may be one of the reasons that wage growth remains stubbornly robust with hourly earnings rising 0.6% month-on-month, double the 0.3% expected by economists.  One reason for caution on the payrolls numbers, however, may be the exceedingly poor response rate, of only 49.4%. As a result, there may be some volatility, between the first and second release of these numbers.  

While the nonfarm payroll numbers have remained strong, there have been some very tentative signs of cooling from other US labour market measures. The October JOLTS data show US job openings falling to 10.3mn in October from 10.7mn in September, with the biggest falls in the construction and manufacturing sectors. The vacancy-to-unemployment rate also fell on the month, although it remains unusually high.

Consistent with the strength of the US labour market US real consumption spending rose by 0.5% m/m in October, on the back of previous rises in both August and September. An easing in supply chain shortages meant that pent-up demand for motor vehicles spurred a 2.7% rise in durable spending.

The flash headline Eurozone CPI fell for the first time in 1.5 years. The measure fell to 10% y/y in November from 10.6% in October, coming in below consensus expectations of 10.4% y/y. The fall was a result of slower increases in energy and services inflation, despite faster price rises in food. It is unclear whether this drop will be sufficient to convince the ECB to moderate their December rate rise to 50bps, rather than the mooted 75bps. Several ECB committee members have been at pains to convince markets that they are unlikely to moderate the pace of increases just yet, especially since core inflation remained unchanged on the month at 5% y/y. 

Eurozone unemployment fell to 6.5% in October from 6.6% in September, better than consensus expectations of remaining steady. Despite the relative strength of the labour market, conditions are expected to soften somewhat in the coming months with indications from the EC employment expectations index and the employment component of the composite PMI suggesting a slowdown in employment growth.

Members of OPEC+ elected to keep production targets unchanged from those agreed at their October meeting, having only recently implemented the 2mn barrel per day cut to production agreed at their last meeting. The OPEC decision comes a day after the EU agreed to impose an oil price cap of USD 60/b on Russian seaborne oil. EU member countries also agreed to provisions which allow the price cap to be reset every 2 months, with a requirement that any new cap is at least 5% below the average market rate. 

Both the Caixin China services and composite PMI readings fell sharply in November, consistent with a contraction in private sector activity. The services index fell to 46.7 in November from 48.4 in October, while the composite index fell to 47 in November from 48.3 in October. 

Today’s Economic Data and Events

• 09:00 India S&P Composite PMI Nov
• 11:00 Turkish CPI and PPI y/y Nov
• 19:00 US Factory orders Oct: forecast 10.3m

Fixed Income

• US Treasuries rallied over the week as Fed chair Jerome Powell gave a strong signal that markets should prepare for a smaller hike at the December FOMC—with 50bps baked into the market—and managed to shrug off another stronger than anticipated non-farm payrolls. After an initial spike in yields, USTs managed to pull higher over the end of the session on Friday. The 2yr UST yield ended the week at 4.2717%, down 18bps, while the 10yr closed at 3.4862%, down 19bps.
• Bond markets in Europe didn’t fare as well, however, with weakness across all major economies. The 10yr bund yield closed up 4bps on Friday to 1.846% while the 10yr gilt closed at 3.142%, up 5bps.
• It will be a heavy week for central bank action with the RBA set to decide policy on Dec 6th, the RBI meeting on Dec 7th along with the Bank of Canada.

FX

• The dollar pulled back for a second week running as markets start to anticipate a shallower pace of monetary tightening from the Fed or an early easing in policy. The broad DXY index was down 1.3% over the course of the week with strong gains coming from the Japanese yen: USDJPY dropped by 3.5% last week with the pair closing at 134.31, its lowest close since August. EURUSD also rallied strongly, up by 1.3% last week to 1.0535, while GBPUSD held above the 1.20 level, closing at 1.228 last week, a gain of 1.6%.
• Commodity currencies were more mixed toward the end of the week with NZDUSD the outperformers. The Kiwi added 2.5% last week to close at 0.6401 while AUDUSD added 0.6% to 0.679. CAD moved in the other direction, however, with USDCAD closing up 0.7% at 1.3468.

Equities

• The Hang Seng index was a global outperformer last week, adding 6.3% by the close on Friday after concerns around unrest in China dissipated and hopes for more easing of lockdown measures heightened. The Shanghai Composite gained 1.8% w/w.
• The tone was risk-on for most markets over the week, although some of the exuberance faded towards the end, with losses across many markets on Friday. In the US, the Dow Jones added 0.2% w/w, but there were bigger gains for the S&P 500 (1.1%) and the NASDAQ (2.1%).
• In Europe, the DAX dropped -0.1% over the week but there were gains elsewhere in Europe as the UK’s FTSE’s 100 added 0.9% w/w and the CAC 0.4%.

Commodities

• Oil prices ended the week on a softer footing but still managed to close higher for the week as a whole. Brent futures closed at USD 85.57/b, up 2.3% over the five days, while WTI added 4.9% to USD 79.98/b. The weekend had some critical binary risks for oil markets. First off, the EU finally agreed on a price cap on Russian oil of USD 60/b. That level is above some of the main Europe bound export grades but below Russia’s key Asia-focused export crude. How Russia responds now is uncertain given that it has said it will not sell to countries participating in the price cap mechanism.
• The second event of the week was the OPEC+ meeting where they agreed to keep output targets unchanged amidst an uncertain supply and demand outlook over the next several months. OPEC+ also indicated they would be prepared to “meet at any time and take immediate additional measures” to address oil market balances, particularly if there was a substantial sell off related to recession risks. All in all the risks were relatively neutral to the market with focus still squarely on how China’s economy evolves under the persistence of the Covid-zero policy.

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