US payroll resilience fuels hopes of soft landing

Europe

Markets in Europe are seeing yet another positive week with the DAX up for the 6th week in a row, while the FTSE100 is back at its highest level since 19th October, after the latest US jobs report came in better than expected and unemployment unexpectedly fell to 3.7%.

The German DAX has once again made another record high today, while the FTSE100 is being helped by a rebound in oil prices from 5-month lows which is helping to boost BP and Shell.

The UK’s second biggest supermarket Sainsbury is also having a solid session, pushing up to its highest level in almost 2 years after Goldman Sachs upgraded it to buy. The recent Kantar numbers showed that Sainsbury managed to perform strongly improving its market share to 15.9%, and it would appear that it is this trend that Goldman is reacting to.

A decline in Anglo American shares is taking some of the edge off today’s FTSE100 gains after the miner warned that it plans to make production cuts next year as a means to reduce costs and boost prices. For 2023 production increased by 3%, however costs rose by 5%. This appears to have prompted a rethink on copper production and that they would be reducing capex next year by $800m.  

In what has been a tough 12 months for the housing market and housebuilders the last few months have provided a welcome relief for Berkeley Group shares with the shares up over 20% from their October lows. Today’s H1 numbers have seen the house builder report pre-tax profits that are slightly better than expected, coming in at £298m an increase of 4.6%, despite a modest decline in revenue to £1.19bn, with the shares slipping back slightly having hit 23-month highs yesterday.

Margins remained steady despite the number of homes being delivered sharply lower from a year ago at 1,785, down from 2,080.

US

US markets opened slightly lower, before rebounding after the latest jobs report showed 199k jobs were added in November, while the unemployment rate slipped to 3.7%. With the participation rate returning to 62.8% and wages remaining at 4%, the idea that the Federal Reserve will be compelled to cut rates aggressively has undergone a bit of a setback with yields moving sharply higher, as rate cut expectations for 2024 got pared back. The latest University of Michigan sentiment survey for November also fed into this more positive outlook as 1 year inflation expectations slowed sharply from 4.5% to 3.1%, helped by lower gasoline prices, while consumer confidence rose sharply to 69.4 from 61.3.

Today’s recovery in yields has seen the US dollar push higher, while the early losses for equity market soon reversed in the wake of the University of Michigan numbers, with the S&P500 pushing up to its highest levels since July and the Nasdaq 100 pushing back towards 16,100.

Chipmaker Broadcom has seen solid share price gains this year, with its acquisition of VMWare, along with optimism over AI chip sales helping to send the shares to record highs last month. Last night’s Q4 results saw revenues come in at $9.3bn in line with expectations, while profits rose to $11.06 a share. The dividend was also increased to $5.25 a rise of 14%. For 2024 Broadcom said that the VMWare acquisition would help boost annual revenues to $50bn, with the shares slipping back in early trade.

DocuSign shares are also struggling despite a strong set of Q3 numbers with revenues rising to $700.4m, while posting a loss of 19c a share. For Q4 revenues are expected to come in between $696m and $700m and annual revenues of $2.75bn, both above consensus forecasts. 

Sports retailer Lululemon shares are under pressure after missing estimates on Q4 guidance.

FX

Today’s US payrolls numbers have helped prompt a rebound in the US dollar, as US rate cut expectations get dialled back with yields rebounding strongly from their weekly lows, with the US dollar finishing the week strongly higher with the exception of the Japanese yen.

The Japanese yen has been the biggest gainer this week as markets quickly reprice the possibility that the central bank might be looking to start normalising its own monetary policy settings, after comments from Bank of Japan governor Ueda, indicating that rates may well come out of negative territory in the coming weeks. This would be an interesting move given this morning’s economic data that showed the Japanese economy contracted more than expected in Q3 by -0.7%. Assuming that we don’t see a subsequent improvement that would be a strange move especially when other central banks are likely to be leaning in a more dovish direction next year, and looking at cutting rates. 

Commodities

Having hit record highs earlier this week, gold prices have continued to come under pressure, sliding to their lowest levels this month, as the early momentum and inability to push through $2,100 has prompted more selling pressure. The rebound in US yields isn’t helping either as US rate cut bets for 2024 get dialled back to later in the year.

Crude oil prices have rebounded strongly from 5-month lows, despite concerns that weak demand will prompt a supply surplus heading into 2024. Despite today’s recovery, crude oil prices are still on course for their 7th successive weekly loss, and its worst run of losses since 2018.