US data helps push FTSE100 to a 3 year high

Europe

European markets look set to round off a decent start to the year with a positive end to the week after the latest US non-farm payrolls report showed solid jobs growth in December, along with a fall in the unemployment rate to 3.5%.

The resilience of the numbers helps to reinforce optimism that the US economy will avoid a hard landing type of recession over the next few months, and that what is positive for the US economy, will also be positive for the global economy.

This is being reflected in the performance of the FTSE100 which is once again performing well, pushing above its 2022 peaks and to its highest level since July 2019, led by basic resources and the energy sector.

Resilience in metals prices is helping to push the likes of Anglo American and Glencore higher, on optimism that demand will start to pick up as China looks to reopen.

Shell shares are modestly higher after the oil giant reported that its Q4 numbers would be affected by the various windfall taxes levied by European and the UK governments to the tune of $2bn. The company also said that its integrated gas trading numbers, which have traditionally been a key revenue earner, were going to be significantly better than they were in Q3.

Standard Chartered Bank shares are slipping back after yesterday’s bid induced a pop higher after reports emerged it had been in discussions with First Abu Dhabi Bank. The euphoria which came about as a result of yesterday’s announcement appears to have given way to a realisation that any deal is unlikely due to the complexity around the number of regulatory approvals that would be needed to get any sort of deal off the ground.  

US

US markets opened higher after the December jobs report showed 223k new jobs were added, while the unemployment rate fell to 3.5% from 3.6%. Encouragingly for those of a less hawkish persuasion average hourly earnings came in below expectations, rising by 4.6%, while the November numbers were revised down from 5.1% to 4.8%, playing down concerns about upward pressure on wages.

This goldilocks scenario, while welcome at the end of what is set to be a negative week for US markets, still comes at a time when other indicators of inflation are still flashing red, and where private sector wages are trending much higher. Nonetheless we still appear to be getting a modest end of week rebound after the latest ISM services survey unexpectedly contracted in December. This unexpected weakness may have more to do with the cold weather impact than any significant economic slowdown.

Next week’s US CPI numbers are also likely to add extra colour to what the Fed does next at its February meeting, and while today’s payrolls and wages numbers are welcome, the odds of a 50bps rate hike in February remain more likely than not.  

The cold weather in December has seen US airline Southwest Airlines say it expects to post a loss in Q4, as a result of the operational issues that resulted in thousands of flight cancellations. Revenue losses are estimated to be in the region of $400m to $425m which in turn is expected to see a negative Q4 impact of around $775m.   

Tesla shares have continued their recent slide after the company announced further price cuts in its China markets on its Model Y model, as well as its Model 3. This puts the Model Y 43% cheaper than it is in the US with the Model 3 being 30% cheaper, as it looks to combat increased competition from the likes of BYD and Xpeng.

FX

The US dollar has remained centre stage after the latest jobs report showed the US economy added 223k jobs in December, while the unemployment rate fell to 3.5%. A weaker than expected wages number saw the US dollar pull back from its highs of the week, sliding to the lows of the day, as profit taking kicked in ahead of the weekend and next week’s December CPI report. The US dollar’s end of week performance hasn’t been helped by a weaker than expected December Services ISM report, which came in at 49.6, although some of this could be down to the cold weather in December.     

The Japanese yen initially pushed to a 12-day low after the Bank of Japan indicated that it saw no immediate need to rush to make major adjustments to its yield curve control policy, however the softer US wages data saw the US dollar slide back off its highs of the week.

The ECB will be relieved to see that headline inflation in the EU fell sharply in December to 9.2%, by much more than expected, and down from 10.1% in November. However, that was where the good news ended given that core prices rose to a new record high of 5.2%, up from 5% in November. This is likely to increase central bank concerns that inflation remains embedded, and that it is too early to start thinking in terms of slowing the pace of rate rises, with the single currency rebounding off one-month lows in the wake of the US jobs report.

The pound also recovered off its lowest levels since November in the wake of the US jobs data, as the early strength in the US dollar gave way to profit taking ahead of next week’s US inflation report.   

Commodities

At the end of what has been a brutal week for crude oil, with the black stuff on course for its worst start to the year since the 1990’s, we’ve seen a modest stabilisation in prices in the past couple of days. The early year weakness appears to be driven by concern that demand is likely to be weak over the first part of the year, and a warning from the IMF that a third of the global economy could fall into recession during 2023.

The slide in US yields in the wake of today’s US jobs report saw gold push up to the highs of the day, before slipping back. It’s still been a good week for the yellow metal, hitting its highest levels since June last year earlier this week, however it does remain vulnerable to a fall back towards $1,800 in the short term ahead of next week’s US December CPI numbers.