Summary:
Last Week Review
• US PAYROLL DATA ENDED THE YEAR WITH A LARGE INCREASE IN EMPLOYMENT, A DECLINE IN THE UNEMPLOYMENT RATE WHILE KEEPING THE FED IN A HAWKISH POSITION. Employment growth in the US unexpectedly accelerated in December 2024 while the unemployment rate fell to 4.1% (from 4.2% in Nov) as the labor market ended the year in solid shape, reinforcing the view that the Federal Reserve will keep interest rates unchanged this month. The number of people out of work aka Initial Jobless Claims (whose report was brought forward to Wednesday as the US commemorated the death of former President Jimmy Carter last Thursday) also showed a decline in the last week. As the final data, NONFARM PAYROLL (Dec) increased by 256,000 jobs, the most since March, said the Bureau of Labor Statistics of the US Department of Labor.
• Data for October and November was revised 8,000 jobs fewer than previously reported. This NFP figure far exceeded the consensus of economists polled by Reuters where they expected payrolls to increase by 160,000 jobs, with estimates ranging from 120,000 to 200,000. The US economy created 2.23 million jobs in the final year of President Joe Biden’s term, which equates to an average of 186,000 jobs per month. Although below the 3 million jobs added in 2023, the increase in employment is in line with the pace seen in 2018.
• The upbeat report supports the US FEDERAL RESERVE’s cautious stance on further monetary policy easing this year amid growing concerns that President-elect DONALD TRUMP’s pledge to massively raise import tariffs and deport millions of undocumented immigrants could fuel inflation. Such concerns were evident in the December 17- 18 FOMC MEETING NOTES published on Wednesday, noting that most Committee members agreed to take a cautious approach in considering further rate cuts. Economists do not expect any rate cuts in the first half of this year.
• Ahead of President Trump’s takeover on January 20, the US economy is considered not only great, but activity is booming especially the Services sector as reported by the ISM Non-Manufacturing PMI (Dec) which is firmly in expansionary territory. Employment in Health Care increased by 46,000 positions, spread across home health care service facilities and hospitals. Employment in the Retail sector jumped by 43,000 jobs after declining by 29,000 in November. This was lifted by hiring in the Retail Apparel and General Merchandise businesses. Job openings in the Professional and Business Services sector increased by 28,000. Employment in the Government sector increased by 33,000 positions. Employment in the Leisure and Hospitality sector increased by 43,000 jobs, with 29,800 positions in Restaurants and Bars. Hiring also increased in the Social Assistance, Information, Construction, Finance, and Insurance and Transportation and Warehousing sectors. However, the Manufacturing sector lost 13,000 jobs, mostly in the Semiconductor and other Electronic components Manufacturing sector. Jobs were also lost in the Mining and Logging sector.
• Average hourly wages increased 0.3% last month after rising 0.4% in November. In the 12 months to December, wages rose 3.9% after rising 4.0% in November. AVERAGE HOURS WORKED was unchanged at 34.3 hours, but Aggregate Income rose 0.4%. Labor income rose at an annualized rate of 5.9% in the fourth quarter, which was the highest increase since the third quarter of 2023. Despite 243,000 people entering the workforce, the PARTICIPATION RATE remained stable at 62.5% for the 3rd consecutive month. The EMPLOYMENT TO POPULATION RATIO, a measure of the economy’s ability to create jobs, also rose to 60.0% from 59.8% in November. The number of people permanently out of work fell by 164,000 to 1.7 million. The US labor market is strong and appears to be tightening, economists said.
• Financial markets are fully anticipating the Fed to keep its benchmark interest rate unchanged in a range of 4.25%-4.50% at the FOMC MEETING on January 30, according to CME’s FEDWATCH survey. The US central bank has indeed lowered the FED FUND RATE by 100 basis points since launching its easing cycle in September 2024. The FED RATE MONITOR TOOL also confirms that view with a current 96% probability that rates will be held in place at this month’s Fed meeting. Even if there is a rate cut this year, it seems that the biggest chance will only be realized in July with a current 41% chance.
• The Fed last month had projected only 2 rate cuts of a quarter point each this year (likely in June & Sept), compared to 4 previously expected last September, recognizing the resilience of the US economy and inflation is still high. As noted, the Fed funds rate was raised by 5.25% in 2022 and 2023.
• EQUITY MARKETS on Wall Street plunged, the S&P500 has fallen 1% since the beginning of 2025. The US DOLLAR strengthened to a 2-year high over a basket of currencies; while the longer-dated US TREASURY YIELD jumped to its highest level since November 2023. The sell-off in bonds was not limited to the US, but also to other parts of the world.
This Week’s Outlook
• This week’s US INFLATION data is likely to test investors’ guts following Friday’s strong Payroll Dec report and uncertainty over Donald Trump’s policy plans. FINANCIAL REPORT season is back in full swing; OIL prices are at their highest in months as energy traders brace for supply disruptions.
• US INFLATION, one of the key risks facing equity markets will be closely watched on Wednesday. Economists expect the December US CPI to show an increase of 2.9% yoy. While the Fed believes that inflation has moderated enough to start cutting interest rates in September, the annualized pace of US inflation remains above the Fed’s target of 2%. The Federal Reserve now projects inflation to rise 2.5% by 2025.
• THE BIG US BANKS will kick off the release of their Q4/2024 reports also on Wednesday, with market participants looking forward to upbeat figures on the performance of JPMorgan, Wells Fargo, Citigroup, and Goldman Sachs, while Bank of America and Morgan Stanley will report results on Thursday. Expectations for bank results have also increased following Trump’s election victory. The president-elect is expected to usher in a wave of deregulation and business-friendly tax reforms, which could significantly boost bank profitability. S&P 500 corporate profits are expected to rise nearly 10% in the quarter from a year earlier, according to LSEG IBES data cited by Reuters.
• UK INFLATION, will be in focus on Wednesday after last week’s sell-off in UK government bonds, known as GILTS, put pressure on the new Labor government in their efforts to stimulate the flagging economy. UK government bond yields have risen steadily since September, reflecting reduced expectations of a BANK OF ENGLAND rate cut, additional borrowing in the new government’s budget on October 30, and higher US Treasury yields with Trump expected to pursue loose fiscal policy and raise tariffs. December CPI is expected to show an annualized increase of 2.6%, remaining above the Bank of England’s target of 2%. BoE officials’ comments will also be in the spotlight where the central bank’s Deputy Governor Sarah Breeden is expected to make a speech on Tuesday.
• CHINA will release a raft of data towards the end of the week that will give investors a chance to see how the world’s second-largest economy is performing as it deals with the blow of impending US tariff increases. GDP data to be released on Friday is expected to confirm that the economy can meet its 5% annual growth target for 2024, as previously announced by President Xi Jinping in late December. Beijing will also release data on house prices, industrial production, and retail sales. Chinese Vice Finance Minister Liao Min said on Friday that the government has sufficient fiscal policy space and tools to support economic growth this year, and will increase spending to spur investment.
• ASIAN MARKETS are forecast to experience volatile movements at the start of this week, rocked by the collapse of the US equity market, sharply rising bond yields, and fears of an inflationary threat. JAPAN’S NIKKEI has already slumped 1% at the open in Tokyo this Monday morning, and the same is likely to happen across the continent.
• Analysts think market sentiment is quite fragile, as the sharp rise in long-term bond yields has tightened financial conditions everywhere. According to Goldman Sachs, aggregate emerging-market financial conditions are now the tightest since the end of 2023. Uncertainty over the potential hit to growth in Asia – especially China – from the Trump administration’s upcoming ‘America First’ trade policy is another reason to be extra cautious.
• TRADE BALANCE figures from China on Monday may not be strong enough to lift the gloomy mood in the market. Economists polled by Reuters expect Export growth to pick up in December while Imports contract for the 3rd consecutive month. December’s Imports figure is likely to attract more attention as it reflects the strength of domestic demand, and therefore may be seen as an early sign of how successful Beijing’s stimulus efforts have been.
OIL PRICES jumped more than 3% to a 3-month high on Friday as traders braced for supply disruptions due to the broadest US sanctions package targeting RUSSIAN oil and gas revenues. President Joe Biden’s administration imposed new sanctions targeting Russian oil producers, tankers, intermediaries, traders and ports, aiming to attack every stage of Moscow’s oil production and distribution chain. BRENT crude oil prices closed at $79.76 per barrel after crossing $80 per barrel for the first time since October 7. US WTI (West Texas Intermediate) crude oil closed at $76.57 per barrel. The timing of the sanctions, ahead of Trump’s inauguration on January 20, makes it likely that he will maintain the sanctions and use them as a negotiating tool for a UKRAINE peace deal, analysts guess.
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