Sunset Market Commentary

Markets

European PMIs were nothing but the amuse-bouche ahead of the more important US economic update, if only because they don’t fuel further speculation for rate hikes per se but simply confirm the ECB’s rates status quo for longer. The stoic FX and FI income reaction was testament with EUR/USD hovering directionless just north of the recently conquered 1.1747 (minor) resistance level. European rates trade a tad higher at the long end (30-yr swap closing in on the 2023 12-yr high). The overall PMI came in below expectations by falling to 51.9 from 52.8. The December reading nevertheless marks a one-year long expansion (>50), the first in the post-pandemic era. Services grew slightly slower (52.6) while manufacturing contracted faster (49.2). New orders, though slower than in November, rose for a fifth month but export business decreased at the fastest rate since March. Employment grew enough in services to offset staff reduction in manufacturing. Companies noted a marked rise in input costs in both sectors but that doesn’t translate so far into output inflation, labeled “modest” by the PMI owners. Manufacturers’ optimism for the future reached its highest since February 2022 (German stimulus approval?) while services companies hit a seven-month low. The UK version surprised to the upside and, combined with a slightly less worse than feared labour market report, pushes GBP higher to EUR/GBP 0.876.

Going into the much-anticipated payrolls, ADP’s weekly update of the job market signaled momentum building in the second half of November (and as previous weak prints drop out of the equation). Hiring picked up to 16 250 jobs per week in the four weeks ending November 29 after four weeks of job losses. Next week’s reading could be strong as well with 4-week MA moving beyond the dire Nov 8 week. Turning to the official labour market data, October employment tanked by 105k, driven by the government sector (-157k). Not all losses were recouped for in November, and even though the +64k was a bit more than the 50k expected it was extremely thinly-based with one sector (health, social assistance) accounting for virtually all of the job creation. Employment for August and September was revised down by a combined 33k. The unemployment rate rose from 4.4% in September to 4.6% in November, low still but a 4-yr high and taking the US economy a step closer in triggering the Sahm recession rule (0.376 vs 0.5 trigger). The rise in the participation rate (62.5%) may offset some of the unemployment rate concerns. The BLS noted that the response rate was lower than usual, muddying the underlying trends. The caveat comes on top of Fed chair Powell last week saying the payrolls reports since April may end up having overestimated employment by an average 60k per month when the final benchmark revisions happens early next year. These statistical quirks complicate the market conclusion, especially with additional noise coming from the ADP, the solid (core) retail sales (control group +0.8%) and decent yet lower-than-last-month US PMIs. Front end yields dropped up to 5 bps in a kneejerk reaction but soon pared losses. Fed bets for a January cut remain largely unchanged at 25%. Long maturities are stable. EUR/USD is eager to test the 1.18 big figure. DXY fell towards 98. US equities open slightly lower.

News & Views

UK PMIs signaled accelerating economic output growth in December, led by the sharpest rise in new business for 14 months. The UK composite output index improved to 52.1 from 51.2. Both services activity (52.1 from 51.3) and manufacturing output (51.8 from 50.3, highest in 15 months) contributed. Growth was still subdued compared to long-run trends. The rise in orders mainly came from services. This also helped backlogs of works to have increased from the first time since February 2023. Despite better output and new orders, staffing levels continued to decline at a solid pace, often attributed to intense cost pressures. Especially input prices in the services sector reaccelerated. S&P commented that the report ‘brought welcome news on faster economic growth at the end of the year, with businesses buoyed in part by the post-Budget lifting of uncertainty’. S&P sees current PMI as consistent with growth accelerating to 0.2% in December, but still only expects quarterly growth in Q4 at 0.1%. Today’s report probably won’t change the assessment of the BoE at Thursday’s policy meeting, expected to result in 25 bps lower rates to 3.75%. Better than/less worse than expected PMI’s & labour market data publish morning are (slightly) lifting UK yields. Sterling rebounds from near EUR/GBP 0.8795 to 0.876.