Please see Brooks Macdonald’s weekly market commentary below late yesterday afternoon:
Equities and bonds rose last week after Fed Chair Powell’s speech contained some dovish comments
Last week saw a further rally in bond and equity markets, catalysed by comments from US Federal Reserve (Fed) Chair Powell which were considered, on the margin, more dovish than previous speeches. Signs that China was moving away from its tougher COVID-19 regime was also welcomed by markets at the tail end of last week. This week’s schedule is significantly quieter with the US Fed now in its communication blackout ahead of its next meeting and a relatively small number of data releases.
Canada’s central bank meeting will be closely watched as the bank leads others with a dovish pivot
While we will not hear from Fed speakers this week, we will hear from the European Central Bank’s (ECB) Lagarde today which will be influential as markets attempt to price the probability of a 50 or 75bp rate hike by the ECB in December. Elsewhere we have Canada’s central bank meeting where policy setters are expected to continue on their dovish pivot seen at the last meeting. The market would welcome a smaller hike which implied a rapid move away from the bank’s rapid tightening of policy earlier in the year which included a 1% hike in July. Australia and India are also in the process of moderating the size of their rate hikes so their meetings on Wednesday will also be watched closely.
US average hourly earnings rose more than expected, however the response rate was very low
Markets on Friday were surprised by an upside beat to the number of new jobs created in November with 263,000 new jobs compared to expectations of 200,0003. The main focus was on the average hourly earnings number however, which came in at 0.6% compared to a consensus figure of 0.3%. Given the importance of income growth to inflation figures, markets took this headline figure poorly with the US equity index falling slightly on the day and US banks continuing their underperformance.
Wage growth inflation remains crucially important and Fed Chair Powell confirmed this when he spoke last week, Indeed, Powell explicitly referenced the strong demand for workers with the Job Openings and Labor Turnover Survey (JOLTS) showing 1.7 jobs for every unemployed worker. There is reason for some caution over the data however as the response rate for the jobs survey was very low, at just 49.4% compared to an average rate of c. 65-70%. This smaller data set is more likely to contain skews and therefore the figures that spooked the markets on Friday may well be heavily revised in coming months.
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Andrew Lloyd DipPFS
06/12/2022