US labour market report shatters complacency – weekly update 5 February

US jobs report triggers another sell-off in US Treasuries

Friday’s US jobs report shook markets, with strong numbers reported across the board coupled with upgrades to the previous readings. Wage growth really stole the show, with average hourly earnings growing 2.9% year on year (yoy), the fastest rate since 2009, up from an upwardly revised 2.7% in December and well ahead of the 2.6% forecast.

The headline Non-Farm Payrolls print also beat expectations, with 200,000 jobs added in January, ahead of the 180,000 expected, and with another 12,000 added to December’s estimate. Unemployment was unchanged as expected at 4.1% (underemployment ticked up by 0.1% to 8.2%) and labour force participation remained at 62.7%.

All of this was enough to trigger another sell-off in US Treasuries as markets fretted about accelerating wage-push inflation, and this in turn rattled equity markets. Will this be vindication of the Phillips Curve argument, presaging an inflationary surge, or is it just the usual noise in the data? We think more towards the latter, but we have highlighted previously that some of the less-covered but still important detailed data have been suggesting building core wage strength, so these data shouldn’t be dismissed entirely.

UK Manufacturing PMI fell

UK Manufacturing PMI unexpectedly fell from 56.3 to 55.2 (56.5 was expected), but still remains firmly in expansionary territory and came with an improvement in the new export orders balance. At the same time, business and consumer surveys show optimism continuing to grow.

GfK Consumer Confidence reading rose

The GfK Consumer Confidence reading rose from -13 to -9 (no change was expected) whilst the Lloyds Business Barometer increased from 28 to 35, and the British Retail Consortium Shop Price Index showed prices falling -0.5% yoy, from -0.6% in December.

Strong US earnings season

It has been a strong US earnings season so far, with 81% of companies beating estimates and 78% beating on revenues according to JPMorgan – this latter stat is the highest since JPM began recording this measure in 2009, and is particularly encouraging in light of our view that asset turnover is needed to drive further earnings growth from here.

Europe has only just started reporting, with solid growth numbers but less surprises than the US: 52% of companies have so far beaten earnings estimates and 55% have beaten on revenues. US EPS growth is up 12% for the year and 15% in Europe.

Last week’s other events

• US PCE inflation (the Federal Reserve’s preferred measure) slipped 0.1% to 1.7% yoy as expected, with core PCE unchanged at 1.5% yoy, as expected. Consumer Confidence from the Conference Board rose from 122.1 to 125.4.
• The Manufacturing PMI reading from the Institute for Supply Management slipped from 59.7 to 59.1, but remained ahead of the 58.6 forecast.
• The last Federal Open Market Committee meeting with Chairwoman Janet Yellen passed uneventfully, though some interpreted the release statement as being slightly more hawkish than earlier notes.
• Eurozone Q4 GDP was in line with forecasts at 2.7% yoy, whilst CPI inflation slipped 0.1% to 1.3% yoy (1.2% was forecast). Core inflation came in at 1.0% yoy (from 0.9%) as expected. Economic confidence fell from a downwardly-revised 115.3 to 114.7 (116.2 was expected).

The markets

The recent complacency seemed to be shattered last week, with nowhere to hide across the main asset classes as markets reacted negatively to the surprises in the US jobs data.

Equities

Equity markets generally started the week on a soft footing, accelerating (down) on Friday after the surprise non-farm payroll numbers. The S&P 500 led equity markets down, falling -2.1% on Friday and down -3.8% on the week. The MSCI Europe ex-UK index shed -3.0% overall for the week, with the MSCI United Kingdom down -2.9%. The Japanese TOPIX was less impacted, but still ended the week down -0.8% whilst the broad MSCI Emerging Market Index returned -2.6%.

Bonds

US 10-year Treasury yields rose for another week, increasing by 18 basis points (bps) to 2.84%. UK 10-year gilt yields rose 13 bps to 1.58% and German 10-year bund yields were up 14 bps to 0.77%.

Commodities

There was no hiding in commodities to avoid the broader sell-off, though movements were relatively subdued. Oil slipped back below the US$70 mark on Brent Crude, ending Friday at US$68.58 per barrel, whilst gold weakened by US$16 to US$1,333 per ounce. Copper was barely changed, just 1 cent lower to US$3.19 per lb.

Currencies

The yen was broadly weaker, whilst the US dollar and euro were marginally stronger against sterling on the week. Sterling ended the week at US$1.41, €1.13 and ¥156.

The week ahead

There are some releases in the UK this week, with another ‘Super Thursday’ from the Bank of England, and although no change in policy is expected, it does come with the latest round of forecasts and a press conference. On Friday, the UK’s Industrial Production will be reported (0.3% yoy from 2.5% expected), and on Monday European Retail Sales are out (1.9% yoy expected from 2.8%). Monday also sees PMI data from Japan, China and the UK, details of which are below. Finally, it is worth highlighting that Thursday is the next deadline to avert a US Government shutdown, so expect that to generate some news flow. The daily breakdown is as follows:

Monday: Early in the morning, Japan reports Services PMI, followed by Chinese Services PMI from Caixin shortly after and UK Services PMI (54.1 from 54.2 expected) after that. European Retail Sales (covered above) rounds off a busy morning, whilst the afternoon is quiet.

Tuesday: A minute after midnight, the British Retail Consortium reports Like-For-Like Sales, expected at 0.7% yoy from 0.6%. Later in the morning, Eurozone Retail PMI is out, and in the afternoon the US reports JOLTS Job Openings.

Wednesday: At midnight, Japan reports the latest wage data, with the coincident index of business economic surveys out a little later. We also have the latest UK House Prices index from Halifax due out, and the European Commission’s updated Economic Forecasts. In the afternoon, the US reports on Mortgage Applications and Consumer Credit with Japan updating on its Trade Balance and Bank Lending late in the evening.

Thursday: The European Central Bank reports its economic bulletin in the morning, and then all eyes will be on the Bank of England, which releases its inflation report and the latest output from the Monetary Policy Committee at midday. China is also due to report Trade Data.

Friday: Chinese inflation data are released early in the morning, with Japan’s Tertiary Industry index also out ahead of UK Industrial Production data. US Wholesale Inventories in the afternoon will see the week out.