Market Report - 08/12/2023
US Non Farm Payrolls surprises ; Markets await central bank decisions
The U.S. economy added more jobs than anticipated in November. Nonfarm payrolls increased by 199,000 jobs in the month of November, after rising by 150,000 previously in October, according to data from the Labor Department's Bureau of Labor Statistics.
Economists had estimated that payrolls would climb by 180,000 – so this upward revision has yet again emphasized the thought that the US Labour Market is stronger than its given credit for.
Average hourly earnings, a key gauge of wage growth, rose at a monthly pace of 0.4% versus October, accelerating from a previous reading of 0.2% and faster than predictions of 0.3%. The unemployment rate in the world's largest economy, meanwhile, unexpectedly ticked down to 3.7%
The data released on Friday adds nuance to the growing theme that the labour demand may be cooling as a result of the Fed's extraordinary run of monetary policy tightening. Separate data released earlier this week revealed that while private companies added fewer jobs than expected in October, job listings hit a 2-1/2-year low and fewer employees quit.
The Fed's decision to raise borrowing prices to a range of 5.25% to 5.50%, the highest level in more than 20 years, has mostly focused on loosening the labour market. Theoretically, a slowdown in the labour market demand might relieve some of the upward pressure on wages and, thus, aid in the Fed's ultimate goal of containing high inflation.
Following another above-consensus U.S. labour market report, the USD has been propelled higher into the weekend. The GBP/USD rate fell by two-thirds of a % in the minutes following news the data release to currently trade in the low 1.25s. Following several weeks of losses for the Dollar versus the Pound, renewed safe haven demand re-entered the markets last week and saw the cable rate drop from highs of 1.2730 by nearly 2 cents!
The Dollar was bid as market-implied expectations for the first U.S. Federal Reserve rate cut of 2024 receded, thereby supporting bond yields.
Looking at the GBP - analysts have begun to ponder whether the ongoing rally from the previous month could be nearing a possible sell-off. The GBP/EUR rate has risen by 2.20% since November 20th, which amounts to an unusually strong rally for a pair that has tended to trend gently within the confines of a well-defined range over the recent months. According to analysts from Deutsche Bank, the Pounds recent rise against the Euro has left the UK-Eurozone rate spread behind, raising questions about the exchange rate's sustainability at current levels.
Since last autumn, the pound has generally held a very tight relationship with real rate differentials against the euro, notes Deutsche Bank. Interest rate differentials explain the difference between the yield of UK and Eurozone bonds. Typically, short-term bonds of two years duration are compared, with the German bund often used to represent the broader Eurozone.
When the spread widens in favour of the Pound, the Pound to Euro rate can be expected to rise, and vice versa.
Looking ahead to next week, markets could continue to be relatively erratic and volatile – with several high tier data releases in the limelight on the economic calendar.
Tuesday 12th Dec:
US CPI release
UK Average weekly earnings
UK unemployment rate
Wednesday 13th Dec:
UK GDP data
UK Industrial Production data
FOMC rate hike decision
Thursday 14th Dec (Super Thursday):
Bank of England rate hike decision
ECB rate hike decision
US retail sales data
Friday 15th Dec:
EU PMI Survey data
UK PMI Survey data
3x Bank of England Speakers