Weekly Market Update – 13 January 2020

USA EMPLOYMENT SITUATION

We like to count things

The Bureau of Economic Analysis estimates a net increase of 140,000 new posts among those reported in December’s nonfarm payroll; a little lower than the consensus expectation for 160,000.

Notwithstanding the usual updates and revisions to the data, we count something like 2.10 million newly created jobs during 2019. That’s down on 2018’s 2.68 million but it does mark a record 10th consecutive year of gains. On this measure, you have to conclude that the US economy is in good shape. Meanwhile, we see nothing in this report – nor any of the other employment surveys – to convince us that the Federal Reserve will do anything other than remain on hold. That ought to prove reasonably supportive of asset prices in both the bond and equity markets.

EUROZONE EMPLOYMENT SITUATION

Young and skint

Eurostat has some good news to share with us. The November estimate for unemployment across the Eurozone comes in at 7.5%. That’s the same rate as that for October but it is 0.4% lower than it was a year earlier. As it happens, 7.5% is the lowest rate since July 2008 and not that far off a record low of 7.3%.

The bad news is that 7.5% equates to 12.3 million people. But that’s only half the story. Youth unemployment is stuck at 15.6% where it has been for much of the last year. In Greece, Spain and Italy, something like a third of those under 25 are unable to find work. The European Union is failing its young.

JAPAN ECONOMIC OUTPUT

One step forward, one step back

Japanese economic data is wonderfully volatile. Take the recent estimates for gross domestic product in the third quarter of this year for example. Initially, boffins at the Cabinet Office’s Economic and Social Research Institute guessed that the world’s third largest economy had expanded at an annualized rate of 0.2%. Last week, the revised data revealed a 1.8% increase instead. That’s some jump.

Unfortunately, the fourth quarter is likely to see even the higher, revised Q3 figure reversed. The effects of this quarter’s increased sales tax – postponed several times previously for fear of the negative impact on consumption – will likely see a sizable contraction.

EUROZONE INFLATION

Low and staying low

If the initial estimate is accurate, November saw inflation accelerate from 1.0% to 1.3% across the Eurozone. That will please the European Central Bank’s (ECB) new chief, Christine Lagarde. Of course, we are some way off the close-to-but-lower-than-2%-target but it’s a step in the right direction after months of steady decline.

Mind you, that’s about all we can say. The ECB is not going to change its policy approach any time soon. As it stands, we expect the Governing Council to maintain its current stance for at least the first half of this year. The implications are that monetary policy will remain supportive of bond prices and, to some extent, equity prices too.

IRAN GEOPOLITICS

Known knowns

Last week, as we were dismissing the potential for a third Gulf war, Brent Crude was priced at $69. Then, following a retaliatory missile attack on Iraqi air basses, it headed to $72. Today a barrel of the black stuff costs $65. That tells you most of what you need to know about the matter. President Trump’s response to the missile attack – as it happens, a relatively tame affair – was to announce an expansion to already-expansive US sanctions and to promise that Iran would not be allowed to build a nuclear weapon while he was president.

So, with monetary policy at each of the major central banks likely on hold, geopolitics may well have an oversized effect on asset prices in the first half of this year.

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