Summary: Bumper US jobs data gives stock markets some good news
Nobody was expecting that. After a shortened week of trading marked by volatility and large sell-offs in household name stocks, led by Apple, US jobs data has given investors a reason to buy across the world.
The FTSE 100 is up by more than 2% in afternoon trading, among a host of strong performances on European bourses. The German Dax was up by 2.7%.
ADP payrolls data yesterday had suggested that the closely followed non-farm payrolls number might be higher than the 177,000 average expected by economists. But at 312,000 new jobs added in December, the tally came in far above the most bullish expectations – while wage growth also accelerated.
The data will provide some comfort to Federal Reserve chairman Jerome Powell, who is speaking at a panel event in Atlanta, Georgia.
Markets have been roiled in recent months by fears that the Fed is intent on a course of monetary tightening even as growth slows – and indeed some recent data have seemed to suggest that a slowdown is on its way.
Yet the jobs numbers seem to point to a different picture, and have given Wall Street a buying signal.
The Dow Jones industrial average and the Nasdaq are both on course for 2% gains, while the S%P 500 is up by 1.8%.
The more positive tone had been set earlier in the day by news that the US and China have scheduled talks beginning on Monday to try to make progress on resolving their long-running trade dispute.
In the UK, meanwhile, today’s services purchasing managers index (PMI) pointed to a continuation of the “Brexit anxiety” which has held back the economy.
Data compiler IHS Markit said the tepid expansion suggested that overall growth in the UK economy will come in at 0.1% for the fourth quarter, a significant slowdown.
Thanks for reading this week – normal service resumes with Graeme Wearden at the helm on Monday. JJ
Trump’s main economics adviser, Larry Kudlow, is on television talking up the economy.
“There is no recession in sight,” says Kudlow, the director of the president’s National Economic Council.
"There is no recession in sight," says White House's Larry Kudlow after strong jobs report https://t.co/ujmxZeJCFp pic.twitter.com/HrcMX9U1qZ
— Bloomberg TV (@BloombergTV) January 4, 2019
The strong jobs data have dampened demand for safe-haven assets: spot gold prices are now down by more than 1% at $1,280.2 per ounce.
The US dollar is now up by around 0.4% against the euro.
Trump has noticed the jobs numbers.
GREAT JOBS NUMBERS JUST ANNOUNCED!
— Donald J. Trump (@realDonaldTrump) January 4, 2019
Although perhaps he will like them if Jerome Powell signals that the Federal Reserve will continue to raise rates this year in his comments in just over half an hour.
Too good to be true?
That’s the question on the massive non-farm payrolls number asked by James Knightley, an economist at ING.
This really positive report should certainly ease creeping fears in the market that the Federal Reserve may be forced to cut interest rates. However, given the growing headwinds facing the US there will be doubts over whether such strength is sustainable.
That list of headwinds is long and potentially potent: “fading support from the fiscal stimulus, a strong US dollar, lagged effects of higher interest rates and weaker external demand amidst worries over trade protectionism” – not to mention the wildcard that is US President Donald Trump.
Certainly the US economy does face more headwinds this year, but this in our view is likely to mean a slower and more modest set of rate hikes versus 2018 rather than actual policy easing. Given the recent financial market turbulence and uncertainty caused by the ongoing government shutdown we suspect there will be a pause in 1Q19, but in an environment of respectable economic growth and rising wage and core inflation pressures we still look for tighter monetary policy over the summer.
US stock markets gain after bumper jobs report
The Nasdaq has led gains on US indices at Wall Street’s opening bell, jumping by 1.6%.
The S&P500 gained 1.4% at the open, while the Dow Jones industrial average rose by more than 300 points, or 1.5%.
It comes after the US economy added more than 312,000 jobs in December, far above economists’ expectations.
The US has now added jobs for 99 consecutive months – the longest streak of job creation since records began.
Over 2018 employers added an average of 220,000 jobs a month, the best growth since 2015, writes Dominic Rushe.
The 3.2% wage gain from a year earlier was the largest since 2008, as the financial crisis began to take hold of the US economy. Read more detail here:
“Strong gains make mockery of recession fears” – economists react to non-farm payrolls.
The jobs numbers suggest the US economy still has “considerable forward momentum”, said Paul Ashworth, chief US economist at Capital Economics. Jobs were added across sectors, while the rise in unemployment can be explained by the big rise in the labour market participation rate, which increased.
The data may suggest the Federal Reserve should keep on raising rates, despite market bets that they won’t for at least another year, said Ashworth:
Overall, the markets may have decided the Fed’s work is done, but the economic data say otherwise.
Mohamed El-Erian, chief economic adviser at Allianz, said Powell will be grinning ahead of his appearance later today.
A #Fed "told you so"?
— Mohamed A. El-Erian (@elerianm) January 4, 2019
With the exception of higher labor participation which supports the notion of some remaining slack in the labor market, this strong December jobs report will be seen IMO by #CentralBankers as supporting more rate hikes & no tweaks to the balance sheet policy https://t.co/p7F5PGChsP
Stock market futures still indicate a big gain at the opening bell for US markets.
Dow Jones industrial average futures up by 1.2%, S&P 500 futures have gained 1.3% for the day, and Nasdaq futures are still up by 1.4%.
Average hourly wages were up +3.2% y/y in December, the highest rate of the recovery. If markets want to focus on a potential negative in an otherwise very positive report, they will worry about inflation and the Fed continuing to hike rates.
— Patrick Chovanec (@prchovanec) January 4, 2019
US wage growth also rose, at an annual rate of 3.2%, above expectations of 3% even as unemployment increased.
US Treasury yields rose in the aftermath of the non-farm payrolls data, as investors sold off 10-year benchmark government bonds. The yield, which moves inversely to price, on the US 10-year rose by four basis points to above 2.64%, before paring slightly.
The stronger-than-expected jobs data could reassure some investors that the US economy is not performing as badly as a recent market sell-off would suggest.
Unemployment in the US economy rose at the same time to 3.9%, as more people were drawn into the labour market.
WOW! US nonfarm #payrolls rose by 312K in December, far more than expected. Yet, unemployment rate rises to 3.9%. pic.twitter.com/7Om1l5AO6K
— jeroen blokland (@jsblokland) January 4, 2019
US jobs numbers smash expectations
Non-farm payrolls data show the US economy added 312,000 jobs in December – far higher than the 177,000 expected by economists.
At the top of the agenda for investors (although not necessarily for Powell) will be the recent market sell-off – spurred in part by fears that the Federal Reserve will tighten monetary policy too much, making a dreaded policy mistake.
Financial markets anticipate zero chance of a rate hike during 2019 following the stock market moves, with thoughts turning to a possible loosening of policy if the economy shows further signs of a downturn.
Dean Popplewell, a vice president at spreadbetter Oanda, asks:
With the market pricing out any Fed hikes for this year, will a strong non-farm payrolls print see dealers reversing their decision that the Fed is ready to abandon its rate hike plans when employment growth is still so strong?
The US jobs data, the non-farm payrolls, can be a major market-moving event because of its implications on the Federal Reserve’s thinking.
Traders are getting a double helping today, with Fed chair Jerome Powell due to speak on a panel with his predecessors, Janet Yellen and Ben Bernanke, at the American Economic Association in Georgia.
But first, at 1:30pm GMT, non-farms from the US Bureau of Labor Statistics. Economists’ consensus expectations point to 177,000 new jobs added in December, up from 155,000 in November.
However, separate data from private-sector payroll provider ADP yesterday came in much higher than expected, prompting questions on whether an upside surprise is coming.
Less than half an hour to go until US jobs data, and American stock futures show markets remain on track for gains today.
Gains of 1.3% and 1.2% respectively for futures in the S&P500 and the Dow Jones industrial average, while Nasdaq futures have gained 1.4%.
The US dollar is slightly lower, with a trade-weighted basket down by 0.1% today, reflecting a small fall against the euro today.
Parliament may not be back until next week, but if you can’t wait for your political fix then John Goldie, a foreign exchange dealer at Argentex, has been gaming the scenarios.
He reckons if Prime Minister Theresa May gets the deal agreed with the EU27 through parliament it could boost sterling by as much as 7%.
However, on the basis that not much has changed since May was forced to pull a vote on the deal last month, if a vote is held and lost in the coming weeks it could do serious damage to sterling, which is currently trading up today at about $1.2677 against the US dollar and €1.1104 against the euro.
The next step would be to request extension to Article 50, says Goldie:
Most likely this would be accepted by the EU27 (they would be more than happy for the possibility of No Brexit At All), and we move towards new votes: an election or referendum. GBPEUR would likely remain range bound for the foreseeable future, though perhaps a return to 1.13-1.15 range. GBPUSD would go back to 1.30 if we’re lucky, but any further move higher would be very much dollar-dependent.
However, it has to be unanimous. If an extension were rejected, this is the route to a full, clean, No Deal exit – by default – through failing to agree and ratify terms within the Article 50 timeframe. This situation would bring about our current predictions of 1.19 and 1.00 against the dollar and the euro respectively.”
Eurozone inflation data from this morning is certainly giving economists something to think about, as lower oil prices threaten to derail the European Central Bank’s gradual tightening of monetary policy.
Price growth moderated to an annual rate of 1.6% in December, the lowest in eight months, according to the European Commission’s statistics office. A sharp drop in energy inflation was the big driver in the fall, from 1.9% in November.
Mario Draghi, the ECB’s president, staked the move to end stimulative asset purchases on rising inflation in the Eurozone.
The data show that higher wages still have not translated into core inflation, said Bert Colijn, an economist at ING.
If the economic situation continues to worsen, it could be that higher wages don’t translate into significantly higher core inflation for the months ahead, although some upward movement can be expected.
Depending on how long oil prices remain in the 50 dollar range, headline inflation could even fall to around 1%. This leaves the ECB in an awkward spot with regards to their first rate hike.
The decline in oil prices is a good thing for economic growth, because fuel is cheaper for businesses, but it can also prove politically difficult for central banks such as the ECB which are mandated to target 2% annual inflation. Hiking interest rates when inflation is below target is not a great look.
We’re coming up to midday on Friday 4 January. For the average FTSE 100 chief executive that means they have almost earned the same amount during 2019 as the average British worker will throughout the whole year.
Calculations by the High Pay Centre thinktank and the Chartered Institute of Personnel and Development (CIPD) show top executives are earning 133 times more than the average worker, at a rate of around £1,020 per hour or £3.9m annually, writes Kalyeena Makortoff.
That means chief executives made do with an earnings increase of 11% compared to a year earlier, while the average Briton’s wages rose by a rather more measly 3.3%, according to the Office for National Statistics.
European markets take heart from trade talks between China and US
Stock markets across the EU have rebounded from yesterday’s losses as a more positive mood takes hold thanks in part to the announcement trade talks between China and the US.
The new talks between Beijing and Washington will take place next week at the vice ministerial level, raising hopes that the trade war started by President Donald Trump will be eased.
The People’s Bank of China has also eased the reserve requirement ratio for banks, indicating its willingness to stimulate the economy if there is a slowdown.
The positive sentiment, after a shortened trading week in which stocks have suffered, has lifted the Europe-wide Stoxx 600 index by 1.35%. Germany’s benchmark Dax index has gained 1.55%, while the French Cac 40 has risen by 1.15%. London’s FTSE 100 is up by 1.26%.
Gaurav Saroliya, head of global macro strategy at Oxford Economics, argues that the recent market downturns have been driven more by sentiment than fundamentals, although “bulls are lacking propulsion”. He added:
The sell-off in equities and other risk assets, fueled by multiple worries such as growth slowdown, higher rates, lack of supportive policy catalysts and geopolitical headwinds, smacks of an overreaction.
It’s looking like a more positive day on Wall Street. Futures are pointing to a rebound after yesterday’s Apple-inspired pain.
S&P 500 futures are up by 1.3%, Dow Jones industrial average futures are up by 1.2%, and Nasdaq futures have gained 1.7%, with a few hours to go yet until markets open in New York.
The sell-off yesterday was steep, but there were also reminders that the US economy is still growing and there is still activity. For instance, pharma company Bristol-Myers Squibb pulled off a truly giant deal for biotech rival Celgene – $74bn in cash and stock, topping $90bn when debt is included.
British consumer credit growth has also slowed, according to more bellwether data for the UK economy published today.
Consumer credit, which includes credit cards and personal loans, grew by 7.1% year-on-year for November, the weakest since March 2015, according to Bank of England figures.
The growth of borrowing from households has been slowing in recent months, in part because double-digit annual growth in debt was unsustainable at a time when broader economic growth was weak. However, unwillingness for consumers to take on more debt when uncertainties abound has also been highlighted by economists.
Mortgage approvals also fell to a seven-month low, the Bank said, adding to the picture of a gloomy housing market.
City economists are split over whether to trust the measly picture of the British economy given by the services data.
The survey is “overstating the extent of the easing” in the British economy at the end of the fourth quarter, says Paul Dales, chief UK economist at Capital Economics – and a 0.1% fourth-quarter growth prediction from IHS Markit is too pessimistic. Dales said:
We’d place more weight on the slightly more upbeat CBI [Confederation of British Industry] growth indicator and think that 0.3% quarter-on-quarter is more likely. If a Brexit deal is agreed soon, growth will surely rise this year.
However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says the weak new orders balance and pessimistic outlook from businesses point to further tepid growth. He said:
The continued weakness of the business activity index in December adds to evidence that the economy effectively has ground to a halt, primarily due to mounting concerns about Brexit.
The British economy is expected to expand by 0.1% in the final quarter says IHS Markit.
The data firm’s forecasts, based on the PMI data from services, manufacturing and construction, are lower than the average of the Treasury’s collection of economists’ forecasts, which point to 0.3% growth in the final quarter of the year.
A quick glance at this graph from IHS Markit/CIPS shows that the sector is not expanding at the pace seen in most months since the global financial crisis.
Employment growth has also weakened as firms hold back. The statement from IHS Markit/CIPS said:
New work increased only marginally during December, which contributed to a slowdown in job creation to its weakest since July 2016.
Sterling and the FTSE 100 are stable after the services PMI release – which was broadly in line with expectations.
The pound is still up by 0.3% against the US dollar, while the FTSE 100 gains have extended to 1.1%. The mid-cap stocks on the FTSE 250 are up by 1.2%.
However, IHS Markit describe it as a “subdued end to 2018”, as business activity rose at one of the slowest rates since the Brexit vote.
November’s data had been a 20-month low, so while the pick-up was greater than expected, the survey points to uncertainty holding back activity.
The services sector is “showing worrying signs of having lost steam amid intensifying Brexit anxiety”, according to Chris Williamson, the IHS Markit economist. He said:
The final two months of 2018 saw the weakest back-to-back expansions of business activity since late-2012 and highlight how clarity on Brexit is needed urgently in order to prevent the economy sliding into contraction.
British services sector expanded faster than expected in December
The British services sector accelerated slightly in December, bucking expectations of a slowdown.
The closely followed purchasing managers index rose to 51.2, up from 50.4 in November, according to data firm IHS Markit.
Economists had expected a reading of 50.7, according to a poll ahead of the data.
Sterling has edged up by about 0.3% ahead of the services PMI data.
Elsewhere on currency markets the euro is up by 0.2% against the dollar, for the most part seemingly unaffected by the marginally weaker than expected performance in its services sector.
The Japanese yen has also weakened against the dollar and the euro.
On the FTSE 100 the mining contingent (which is particularly sensitive to global demand) are all performing well, with Antofagasta, Anglo American, Glencore and BHP all up by around 3% or more.
At the risk of services PMI overload, it’s worth taking a look at one of the main drivers of the slightly more hopeful feel on markets this morning from earlier in the day.
Chinese markets, which enjoyed strong recoveries today, were boosted by the Caixin services PMI, which showed expansion in the sector accelerating in December.
The reading rose to a five-month high of 52.2 in December, up from 51.9 the month before.
It comes after the equivalent data for the manufacturing sector prompted a sell-off, which was only exacerbated by Apple’s shock forecast cut. Chinese authorities have also lowered reserve requirements for banks, theoretically allowing them to lend more in a bid to pump up growth.
Mike van Dulken and Artjom Hatsaturjants, analysts at Accendo Markets, said:
After an ugly start to 2019 for equities, growth concerns abound. The China services update (and stimulus pledge) helps cushion manufacturing contraction this week, and confirms Monday’s official data suggesting services are in ruder health.
French services activity fell for the first time since June 2016, which IHS Markit said reflects disruption from the “gilet jaunes”, the protesters on living costs named after their yellow vests.
Services firms reported the weakest new business volumes for four years in December.
Chris Williamson, IHS Markit’s chief business economist, said:
The eurozone economy moved down another gear at the end of 2018, with growth down considerably from the elevated rates at thestart of the year.
Neither are businesses expecting any rebound in demand, he added, pointing to a not insignificant list of headwinds: “trade wars, Brexit, heightened political uncertainty, financial market volatility and slower global economic growth.”
The Eurozone composite purchasing managers index (PMI) has fallen to the lowest since July 2013.
The indicator of Eurozone economic activity fell to 51.1 in December, still above the 50 no-change mark but well below the previous reading of 52.7, IHS Markit reported.
The reading was dragged back by the services sector, where reading came in at 51.2 in December, the lowest level in over four years.
All looking very green on European markets.
Italy’s FTSE MIB is the leader, up by 1.3%, while the FTSE 100 in London has given up some of the opening gain for a 0.6% rise – although it is likely be a holding pattern until 9:30am, when the UK services PMI data comes in.
The owner of the Slug and Lettuce chain of bars has reported its Christmas trading, and it’s mostly positive news.
Sales at Stonegate rose by 12% on the year in the two weeks to 1 January, the private company reported today.
Investors have been on the lookout for any signs that retail and other consumer discretionary companies struggled over Christmas, after entertainment retailer HMV collapsed into administration before the new year. However, those few firms which have reported so far appear to have performed relatively well despite bad weather and weak spending patterns – see Next’s update from yesterday.
“We have entered 2019 with positive momentum,” said Simon Longbottom, Stonegate’s chief executive.
British house price growth slows to its weakest since 2013.
Nationwide’s house price barometer shows a marked slowdown in the market for homes, with annual growth across the UK of just 0.5%, the slowest since February 2013.
The slowdown was broadly expected, but is still notable, said Robert Gardner, chief economist at Nationwide.
UK house price growth slowed noticeably as 2018 drew to a close, with prices just 0.5% higher than December 2017. This marks a noticeable slowdown from previous months.
Prices fell by 0.7% in December compared to a 0.4% decrease in November. The average British house price is now £212,281.
The slowdown was prompted by the “impact of the uncertain economic outlook on buyer sentiment”, he added – a not very subtle reference to Brexit.
It has all the signs of a bounce on the FTSE 100 risers, with oil-exposed companies among the early performers.
Oil services firm John Wood Group is up by 3.3%, while packaging firm Mondi gained 2.4% in early trading.
FTSE 100 opens up by 1%.
France’s Cac 40 up 0.8% and Italy’s FTSE MIB rises by 0.86%. Europe-wide Stoxx 600 index gains 0.8%.
Introduction: The British economy – festive cheer or a big freeze?
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
In the UK all eyes today are on the services sector, with the closely watched services purchasing managers index (PMI) up at 9:30am to give the first reading on how the majority of the economy performed at the end of 2018.
The problems facing the British economy are well known by now: Brexit uncertainty, weaker consumer spending, and long-term productivity struggles. With only two more readings to go before the UK leaves the EU on 29 March, economists will be keen to see how businesses are coping with the strain.
Beyond the UK, Apple lost almost a tenth of its value in a single trading session, as investors finally had the chance to catch up to its downgrade on Wednesday night.
The selling pushed Apple’s market capitalisation – only a few months ago more than $1 trillion – below Google owner Alphabet. And US stocks, not helped by weak manufacturing data, were dragged down in its wake: the S&P 500 lost 2.5%, the Dow Jones industrial average fell by 2.8%, and the tech-heavy Nasdaq lost 3%.
It was an “aggressive sell-off” in the US and beyond because of the broader implications of slower growth, particularly in China, said Craig Erlam, senior market analyst at Oanda.
This naturally feeds into investors deep-rooted fears about the global economy this year and so the impact of the warning stretched well beyond Apple and its suppliers and even, it would seem, into the FX market where the yen was heavily bid.
What a day then, for Jerome Powell, the Federal Reserve chair, to make his first public comments of 2019 – a year when markets are forecasting no rate hikes from the US central bank. Powell will join his predecessors, Janet Yellen and Ben Bernanke, on a panel discussion after non-farm payrolls data gives a snapshot of the US labour market.
Fritz Louw, a currency analyst at MUFG, said:
We fully expect the overall tone of [Powell’s] comments to indicate a willingness to change course given the emerging evidence of a slowdown in economic activity. Chairman Powell will be fully aware that the tightening of financial market conditions in November-December has played a role in hitting sentiment and hence the Fed can be very influential in changing those conditions.
Still, a big sigh of relief can be heard from China this morning as the waves from Apple’s revenue forecast downgrade calm – although Japanese stocks still sold off after coming back from a holiday. Chinese stock markets have bounced back from steep losses to gains of 2.1% on the Shanghai stock exchange and 2.4% on the CSI 300 index which includes Shenzhen.
The agenda
- 9am GMT: Eurozone services PMI
- 9:30am GMT: UK services PMI
- 9:30am GMT: UK mortgage approvals and consumer credit
- 10am GMT: Eurozone inflation
- 1:30pm GMT: Non-farm payrolls
- 3:15pm GMT: Jerome Powell speech
