Good, Bad, And Ugly

By Jane Foley at Rabobank

Shanghai has eased some of its Covid restrictions following the lead of Beijing, Shenzhen and Guangzhou, all of which have relaxed curbs in recent days in response to recent protests.  The news has provided support to risky appetite, leading Asian equities higher despite the poorer tone of today’s China’s November Caixin PMI data release.  That said, US and European futures have retained a mixed tone. 

Risk appetite was wrong footed by the strength in the US non-farm payrolls report on Friday.  Not only was the headline increase in payrolls stronger than expected at 263K, but earnings were also firm.  Hourly earnings rose by a surprisingly strong 0.6% m/m in November.  This was the biggest rise since January and gains were broad-based across sectors.  Bearing in mind the slower pace of activity noted in the US ISM report the previous day, this hinted at a stagflationary tone.  Treasury yields spiked and equity indices plunged in response to Friday’s Labour report, though the markets settled into the close and treasuries still ended higher on the week. 

Friday’s remarks from Chicago Fed President Evans underpinned the perception that the robust US labor market data are unlikely to up-end the expectation that the FOMC will move back to a 50-bps incremental rate hike when its meets next week.  That said, the continued tightness of the labour market should focus attention on the persistence of core inflation and the duration of the Fed’s policy response.  It is our view that the Fed will need to hold rates at the terminal rate until 2024. 

If President Biden was unapologetic last week about the protectionist tone of the US’s Inflation Reduction Act, European Commission von der Leyen has indicated that the EU is prepared to follow the same cue.  European politician and companies have been quick to point out that tax credits and subsides for products such as electric vehicles, which form the basis of the new law, give US-based companies an unfair advantage and could tempt business away from Europe.  Von der Leyen has suggested that “new and additional funding at the EU level” should be assessed and that the EU should “take action to rebalance the playing field”. 

US/EU relations have been going through a sour patch. Additionally, European Council President Michel may be about to stir up some dis-harmony within the bloc. The FT has reported that Michel is calling for a renewed debate on common financing within the EU.  His concerns relate specifically to the differing abilities of member nations to support industries embattled by the energy crisis.  His remarks coincide with today’s commencement of the EU’s ban of seaborne Russian oil imports.  Opec+ yesterday promised to be ready to take immediate action to stabilise the global oil market, if necessary, though it decided against making any changes to its production targets for the time being. 

On Friday, G7 nations together with Australia agreed to a USD60/b price cap on Russian seaborne crude after Poland gave its support.  The price cap is due to take effect from today or very soon afterwards.  Poland had pushed for the cap to be as low as possible to squeeze revenues to Russia and to limit Moscow’s ability to finance the war in Ukraine. Russian Deputy PM Novak called the move a gross interference which was in contradiction to free trade.  He stated that Russia is “working on mechanisms to prohibit the use of a price cap instrument” and that the country will only sell oil and petroleum products to those countries under market conditions”. 

In the UK strike action remains a feature.  Every day in December is expected to be marred by action of some sort over pay. Weekend talks between unions, train operators and the government had been labelled ‘constructive’, though a deal still proved to be elusive. Nurses and postal staff are among the other key workers due to take strike action this month. While UK political backdrop retains a calmer air since the start of PM Sunak’s premiership, neither the economy nor this own party are proving easy to manage.  Last week saw the opposition Labour party extend its majority in a Chester by-election. This news coincided by news that senior Tory Javid will not stand as an MP at the next election. A slew of Tories has already indicated they will throw in the towel at the general election rather than face the possibly that the party could be in opposition for some years.

Week ahead

A 50 bp rate increase from the BoC is expected on December 7.  On the margin this may further support expectations that the Fed will also feel more comfortable with the same size move on December 14.  Among this week’s US releases are final November PMI and durable goods data but also the December University of Michigan sentiment index and November PPI inflation.  The latter is expected to show a tapering off in the rate of price pressures, albeit at still uncomfortably high levels.  The European data calendar also contains final PMI readings.  In addition, German factory orders are due.  ECB speakers today include President Lagarde and Chief economist Lane is due to be heard later in the week before the blackout period descends ahead of the policy decision on December 15. Comments from ECB’s Villeroy yesterday indicate his preference for a 50-bps hike next week.  Up until recently market expectations pointed to a significant risk of a 75 bp move.  The RBA meets tomorrow and another 25-bps rate hike looks likely, though weaker than expected October CPI inflation data have focussed attention on the possibility that the bank may favour smaller incremental moves going forward.