U.S. Jobs Report Spurs Yields, Central Banks Expected to Maintain Steady Rates
Last Week Review
Global equities were flat, with a 0.6% loss in emerging markets including weakness in China offset by gains in developed markets. The two-year Treasury yield rose 0.18% while the 10-year yield rose 0.03%. The 10-year yield had fallen as much as 0.1%, but it ended the week up following the U.S. jobs report that showed strength. High yield gained 0.4% with the average credit spread falling 0.14% to 3.60%, the lowest in more than 18 months.
Moody’s Downgrades China’s Debt Outlook
Moody’s lowered its outlook for China’s credit rating to negative on concerns that the government would need to support financially stressed regions and localities in the country. Exports remain weak in aggregate and imports fell 0.6% year-over-year. However, China’s composite Purchasing Managers’ Index released last week suggests that economic activity may have stabilized, and exports rose 0.5% year-over-year. Toward the end of the week, the government indicated proactive fiscal policy in 2024.
Yen Strengthens on Bank of Japan Remarks
Bank of Japan Governor Kazuo Ueda and other policymakers raised suspicion that the central bank may exit negative interest rates sooner than expected. The yen and Japanese government bond yields strengthened in response. Separately, the central banks in Australia and Canada made no changes to their rates last week.
November U.S. Jobs Report Underscores Strength
Companies added 199,000 non-farm jobs in November, above expectations of 185,000. This marks an acceleration from 150,000 jobs added in October, which took a roughly 30,000 hit from the auto strikes. Overall, payrolls continue to grow and remain strong. The unemployment rate moved lower to 3.7%, below expectations of 3.9%, and the labor force participation rate rose to 62.8%. Wage growth in November was unchanged at 4.0% year-over-year.
U.S. Job Openings Suggest Easing but Still Tight Labor Market
Job openings in October dropped more than expected to 8.73 million, according to the U.S. government’s Job Openings and Labor Turnover Survey (JOLTS). Openings remain above the pre-pandemic peak of 7.59 million, but they are at the lowest level since early 2021 and are in a clear downtrend. As a result, the openings-to-unemployed ratio fell to 1.3 from 1.5. The quits rate, which is generally perceived to be a leading indicator of wage growth, held at 2.3%. It’s at a recent low and in line with the pre-pandemic level. There is still a labor deficit, but the shortfall is declining alongside indications of easing wage growth.
This Week Preview
U.S. Core Inflation Expected to Stay Unchanged
Core U.S. inflation, which excludes more volatile food and energy prices, is expected to remain unchanged in November at 4% year-over-year, based on the Consumer Price Index scheduled for release on Tuesday. Total inflation is expected to decrease to 3.1% from 3.2%.
Central Banks in U.S. and Europe Expected to Keep Rates Steady
The Fed is not expected to announce on Wednesday a change its policy rate, but it will release an updated Summary of Economic Projections. The European Central Bank and Bank of England are also scheduled to meet this week. Investors do not expect either of the central banks to announce a major policy change on Thursday. Investors will likely scrutinize central bank messaging — particularly with the European Central Bank after one of its more hawkish members did not rule out last week a rate cut before mid-next year.
Developed Markets to Release Preliminary Purchasing Data
The U.S., Europe, U.K., and Japan are expected to release preliminary flash Purchasing Managers’ Index data this week, indicating the health of their economies. In the U.S., the data is expected to show similar trends as before, with continued expanding services activity and contracting manufacturing. For Europe, investors expect some improvement in services and manufacturing, though still contracting.
China Expected to Shown Positive Retail Sales and Production Growth
China fixed assets investment, industrial production and retail sales data are scheduled to be released. Fixed assets investment are expected grow 3% year-over-year, industrial production growth is projected to tick up to 4.6%, and retail sales growth is expected to accelerate to 12.5%.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of December 10, 2023.
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