Please see todays Daily Investment Bulletin from Brooks Macdonald:
What has happened
Some of the early 2023 optimism faded yesterday as Fed officials pushed back against dovish bond market expectations and US data continued to point to strong demand. The US equity index moved back into negative year-to-date territory, underperforming European equities which were slightly down on the day.
US politics
The impasse within the US House of Representatives continued for a third day yesterday with Kevin McCarthy still unable to reach a majority of votes. There have now been 11 failed ballots, the first time this has happened since 1860. McCarthy has offered holdouts one of their demands, namely that any single member of the House can now call a motion to oust the Speaker. While this may improve McCarthy’s chances of reaching a majority, this could create legislative gridlock down the road when it comes to contentious legislation.
Jobs data
US jobs data continues to be a driving force behind the weaker US market sentiment, with the ADP report of private payrolls showing a stronger-than-expected gain in December whilst November’s number was also revised upwards. Initial jobless claims also hit a 3-month low in the last week of 2022, suggesting that the employment market remains robust. All of this, and the JOLTS report earlier this week, leads us into today’s US non-farm payroll report of US employment. The market expects the number of new jobs in December to have fallen from 263,000 in November to 200,000. This would leave the unemployment rate steady at 3.7%. Perhaps the more interesting measure will be the average hourly earnings figure which is expected to rise by 0.4%, less than November’s 0.6% but still a high number. For context, November’s 0.6% gain was the highest in 10 months. On a year-on-year basis average hourly earnings in the US are expected to have risen by 5%.
What does Brooks Macdonald think
With the jobs data continuing to point to a strong US labour market, Fed speakers have been eager to stress the bank’s focus on tighter monetary policy. President George said yesterday that the Fed should keep US interest rates above 5% into 2024 and President Bostic reiterated that inflation levels remained ‘way too high’. A slowdown in US economic activity during 2023 is the base case amongst economists however with the labour market remaining robust, there is a risk that the Fed overtightens in the short-term, possibly exacerbating the US downturn when it comes.
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Andrew Lloyd DipPFS
06/01/2023