Please see below, a daily investment update received this morning from Brooks Macdonald – 07/01/2022
What has happened
Ahead of the key employment report for the US economy, yesterday’s trading session was mostly focused on finding an equilibrium after the volatility on Wednesday created by the Fed minutes. European indices were lower, recalibrating for the US moves the previous days however there were signs of US stabilisation with the headline and technology index both close to flat for the day.
US jobs report
The key event of the day will be the release of the US jobs report for December. Given the hawkish noises from the Fed in recent months the health of the economy is of critical importance as it will determine whether the Fed utilises the rate and tightening optionality it has created within the bond market. Economist consensus points to 400,000 jobs being created in December with attention also being paid to the average hourly earnings for signs of further wage inflation. Omicron-related disruptions are the big unknown so there may be more COVID noise within this data set than, say, November’s numbers. Wage inflation remains a critical component of the future inflation narrative, we have seen household savings rates decline in recent months as prices rise and we return to the ‘new’ economic normal, equally energy costs have risen, weighing on the consumer’s discretionary spending power. Sustained wage increases would enable the consumer to shoulder these higher costs otherwise consumer demand may struggle in the face of 2021’s heady inflation numbers.
ISM data
The Institute for Supply Management issued their survey of economic activity in the services sector yesterday. The ISM index is calculated based on surveyed businesses saying that economic conditions are ‘better’, the ‘same’, or ‘worse’ than the previous month. These surveys are diffusion indices meaning that a reading of 50 means that the average economic conditions of those surveyed was the ‘same’ as the previous month. Figures above 50 imply more ‘better’ responses and therefore expansion, readings below 50 imply more ‘worse’ responses and therefore contraction. Yesterday’s reading was 62 for December which, whilst strong, missed economist expectations of 67.
What does Brooks Macdonald think
Yesterday’s ISM services miss underlines the difficulty in estimating data with the impact of Omicron, should the same occur today, the US jobs report could have plenty of room for surprise. Given the importance of the report to the current swings in market leadership, this could lead to further volatility.
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Alex Kitteringham
7th January 2022