Reading the mainstream media’s reaction to today’s payrolls report, one would be left with the impression that it was generally on the goldilocks side and indicative of a possible soft-landing – consider this from Bloomberg: “the US labor market stayed resilient last month while wage gains cooled, raising hopes that the economy may dodge a recession and the Federal Reserve will further slow its aggressive campaign of interest-rate hikes.”

Which is accurate: wage growth indeed slowed down following a major revision to the data (remember that 0.6% M/M jump in average hourly earnings that freaked out the market last month? Well, it was quietly revised to 0.4% today), and as a result – as even Fed mouthpiece Nick Timiraos pointed out earlier – “Revisions to average hourly earnings data paint a marginally less worrisome picture for the Fed on wages than the Nov report. The upturn in wage growth in Nov (originally reported as +0.6%) was revised (to +0.4%). The 4.6% annual wage growth in Dec was the lowest since Aug ’21.“

The drop in wage growth was consistent with the warning from the ADP earlier this week, which found that December ushered in “the largest decline in pay growth for job stayers in the three-year series history” (and even job-changers saw a modest drop in wage growth).

There was more: not only did average hourly earnings drop, but so did average hours worked, which has a major impact on the average wages, and had hours been flat, the decline in average wages would have been even more pronounced.

Ok, so wages are finally starting to reflect reality – and indicating that inflation pressures are clearly easing, which is to be expected for any economy sliding into a recession.

But what about the underlying issues with the jobs data? What about that massive divergence between the employment number (from the Household Survey) and the monthly payrolls change (from the Establishment survey). Recall that it was just last month that we reported that divergence between these two data sets hit a record 2.7 million, a difference which got added focus just a few days later after the Philadelphia Fed reported that its own calculations found that in Q2 the US added just 10,000 jobs, not the 1.1 million reported by the BLS.

The answer is that today, the BLS decided to finally shrink the record difference between the Household and Establishment surveys, and while 223K payrolls were added (a number which was actually down 244K on an seasonally unadjusted basis), the Household survey outdid itself, and its matching Employment number soared by a whopping 717K.

There is a reason for that: we have entered the BLS’s annual revisions season, and to start the year the Bureau revises all of its historical series, starting with the Household Survey, as follows:

Seasonally adjusted household survey data have been revised using updated seasonal adjustment factors, a procedure done at the end of each calendar year. Seasonally, adjusted estimates back to January 2018 were subject to revision. The unemployment rates for January 2022 through November 2022 (as originally published and as revised), appear in table A at the end of this news release, along with additional information |about the revisions.   

Whatever the specific reason behind the historical adjustment, however, the cumulative record difference between Payrolls and Employment shrank from the all time high 2.7 million hit last month to “only” 2.1 million.

Luckily, unlike the Establishment survey which gives us shotgun job estimates with little to no granularity, the Household survey provides several layers of detail and we can find just how the BLS managed to trim this gaping difference.

The answer, it will come as little surprise to anyone, is that once again the surge in employment was entirely a function of part-time workers and multiple job-holders.

Here are the facts: in December, the number of full-time workers was 132.299 million, down exactly one 1K workers from the month before; at the same time, the number of part-time workers exploded by 679K, from 26.115 million to 26.794 million (source). Finally, adding insult to injury, the number of multiple jobholders, or those workers who need to hold more than 1 job to make ends meet yet who are double-counted for Payroll (establishment survey) purposes, surged by 370K (which means that the 223K payrolls number is really negative if adjusted for how many people actually got new jobs).

What does this mean on a longer-term basis, i.e., going back to that infamous month of March which we first flagged as the moment when something broke in the jobs data, and extending through Dec 31? Here too we find something striking: the total number of full-time jobs has declined by 288K in the past ten months, which however has been more than offset by the 886K increase in part-time jobs.

And the punchline: multiple jobholders have increased by a massive 684K over this period.

This means that contrary to conventional wisdom, some 684K jobs added in the past 10 months were not the equivalent of 684K workers finding a job, but 684K workers finding more than one job to afford life during this latest episode of soaring inflation.

What does this mean in the grand scheme of things? Well, the Philadelphia Fed’s observations still stand, and while the BLS may claim that payroll prints were accurate (at least until next month’s wholesale Establishment survey revision), digging deeper reveals once again that the quality composition of these jobs was far more dubious. In fact, we know that in December, the entire employment increase was thanks to part-time workers, and we don’t have to tell readers that part-time jobs pay far less, have zero benefits and generally are far worse quality than full-time. It also means that the bulk of job growth since March has been in the multiple jobholder category, and that instead of 684K jobs having been given, what really happened is that 684K workers found more than one job to be able to afford living under the Biden administration.

Authored by MN Gordon via EconomicPrism.com,

The New Year brings both optimism and hope.  A chance to start fresh.  To turn over a new leaf.

The sentiment is welcome.  The outcome, however, can be a grave disappointment.

If you recall, 2022 was supposed to be a year of redemption and prosperity.  After the ugly coronavirus fiasco, the economy was finally reopening.  The general belief was that the resurgence of economic activity was going to bring a new boom and a new cycle of prosperity.

But then something unexpected happened.  On the first day of market trading, January 3, 2022, the S&P 500 hit a closing peak of 4,796.  Yesterday, just over a year later, the S&P 500 closed at 3,808.  Down over 20 percent.

Over this duration, the yield on the 10-Year Treasury note spiked from 1.66 percent to 3.70 percent.  In other words, Uncle Sam’s borrowing costs have more than doubled.

At the same time, transitory inflation proved to be enduring.  And gross domestic product (GDP) went negative for the first two quarters of 2022.

What happened?

The calendar year may have started anew.  But past actions remained.  And there was plenty of wreckage from the past to be reconciled.

Much of this wreckage was created by the central planners at the U.S. Treasury Department and the Federal Reserve.  Decades of money printing are not without consequences.  And, unfortunately, the consequences dramatically impact your life and your livelihood.

The wreckage doesn’t magically disappear when the calendar hits January 1.  Rather, it piles up from one year to the next like rotting refuse at a municipal landfill.

How will the central planners manipulate your livelihood in 2023?  How will Federal Reserve monetary policy influence your job, investments, and discretionary income?

Here we scratch for answers…

Foolish Ideas

Ultra-mega money printing in 2020-21 to counter the effects of government ordered lockdowns resulted in a supply of dollars that was far too great for the economy to absorb.  This, along with the shortage of goods and services, also a consequence of government lockdowns, resulted in a situation where too many dollars were chasing too few goods.

Paying people not to work with printing press money was a foolish idea.  Everyone knew it – or should have known it.  Nonetheless, wild theories were concocted to provide the rationale for doing more of it.

People that should have known better swallowed the bait hook, line, and sinker.  For example, gangsta rap pioneer, Ice Cube, upon discovering Modern Monetary Theory in 2020, proclaimed:

“America loves to cry broke.  But in America money does grow on trees.”

The wreckage of ultra-mega money printing caught up with Americans in 2022.  Consumer price inflation raged all year.  And while the rate of consumer price inflation has slowed, it is still much, much higher than any honest economy can tolerate.

The latest consumer price index (CPI) report, which was released on December 13, shows consumer prices increased at an annual rate of 7.1 percent in November – down from 9.1 percent in June.  The December CPI will be reported next week.

At this point, even if the rate of consumer price inflation continues to slow, the Fed has some work to do.  If it really wants to contain inflation it must hike rates further to increase borrowing costs.  Over time, this should make dollars dearer, in relation to goods and services, and reduce the rate of consumer price inflation.

Will it work?

Wrecking the Future

We believe it eventually will.  But the consequence will be severe.  Remember, economics is not an exact science.  Monetary policy is even less exact.

How does the Fed know what the supply of dollars should be when it doesn’t know what the demand for dollars will be?

It’s a question the Fed can’t answer.  For the Fed doesn’t know if consumers will continue to chase the price of goods and services higher or if they will start stuffing dollars in their mattresses.  No one does.

A recession in 2023 is appearing more and more likely.  Thus, what if 2023 turns out to be a year of deflation rather than inflation?

Under this scenario, additional rate hikes would be a mistake.  Still, what can the Fed really do?

It can guess about the future, and what the demand for dollars will be.  Or it can continue to do what it always does.  That is, the Fed will look to the past for guidance on how to influence the future.

Minutes from the December Federal Open Market Committee (FOMC) meeting were released this week.  Per the minutes:

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.  Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”

Given the current CPI reading, this means there will be additional rate hikes…and associated consequences.  The Fed must wreck the future to save it.

Are You Prepared for a Hard Landing?

How will the economy react to interest rates that remain relatively higher for longer?

By this, the idea that there will be a soft landing seems highly unlikely.  The economy, after decades of ultra-low interest rates, is not equipped to easily accommodate a sustained period of relatively higher interest rates.

There’s simply too much debt outstanding.  Government debt (federal, state, and local).  Corporate debt.  Individual consumer debt.  We anticipate there will be significant challenges making debt payments in 2023.

The effect of higher interest rates will be twofold. 

1. Less borrowing and spending will result in less economic activity, which will lead to higher unemployment. 

2. Slower (or declining) economic growth will make servicing debt more difficult, which will be further exacerbated by relatively higher interest rates.

In fact, it’s already happening.  Amazon CEO, Andy Jassy, announced this week that the company plans to RIF (reduction in force) 18,000 workers.  This is in addition to the nearly 125,000 employees from large U.S. companies that were RIFed in 2022, according to the Forbes layoff tracker.

Many of these workers will land on their feet and will continue paying their debts without a hitch.  But many won’t.

Past mistakes and misallocated capital are being grossly exposed by relatively higher interest rates.  Soon, this will all rollup into a massive financial panic.

Perhaps a big corporate or municipal government default will be the triggering event.  Maybe a giant investment fund will suspend withdrawals.

Then the reality that a Fed bailout is not available for the first time since the ‘Fed put’ was instituted in 1987 will set in.

As the debt market and stock market simultaneously melt down, what assets will capital panic into?  Will it rush into the dollar?  Will it stampede into gold?  What about oil or something else?

Without question, a hard landing is coming.  Are you prepared?

*  *  *

Anticipating and positioning your capital ahead of the panic stampede is an opportunity to obtain life-changing wealth.  Click Here if you’re interested in learning more about this unique opportunity, and how to exploit it!

Authored by Lance Roberts via RealInvestmentAdvice.com,

Just recently, James Bullard, President of the St. Louis Federal Reserve, suggested the central bank might need to employ the “7% solution” to ensure the complete destruction of inflation. As we have discussed previously, the fear is repeating the policy errors of the late 1970s that led to entrenched inflation.

While the “7% solution” is supported by the likes of Larry Summers and others, there are vast differences between the economy today versus then. Trying to increase the Fed funds rate to 7%, 2.5% higher than they are currently, risks triggering a catastrophically deep recession.

The reason is the 2020 inflation was the result of one-time artificial influences versus the 1970s. As we noted previously in“That 70s Show:”

“The buildup of inflation was in the works long before the Arab Oil Embargo. Economic growth, wages, and savings rates catalyzed ‘demand push’ inflation. In other words, as economic growth increased, economic demand led to higher prices and wages.”

“Furthermore, the Government ran no deficit, and household debt to net worth was about 60%. So, while inflation was increasing and interest rates rose in tandem, the average household could sustain their living standard. The chart shows the difference between household debt versus incomes in the pre-and post-financialization eras.”

What was most notable is the Fed’s inflation fight didn’t start in 1980 but persisted through the entirety of the 60s and 70s. As shown, as economic growth expanded, increasing wages and savings, the entire period was marked by inflation surges. Repeatedly, the Fed took action to slow inflationary pressures, which resulted in the repeated market and economic downturns.

The enormous debt load is the most crucial difference between applying the “7% solution” today and in the 70s. Today, consumers, businesses, and even the Government depend on low-interest debt to sustain an ongoing spending spree.

A “7% solution” could pop the massive “debt bubble,” leading to severe economic consequences.

The Debt Problem

The massive debt levels provide the single most significant risk and challenge to the Federal Reserve. It is also why the Fed is desperate to return inflation to low levels, even if it means weaker economic growth. Jerome Powell recently stated the same.

“We need to act now, forthrightly, strongly as we have been doing. It is very important that inflation expectations remain anchored. What we hope to achieve is a period of growth below trend.”

That last sentence is the most important.

There are some important financial implications for below-trend economic growth. As we discussed in “The Coming Reversion To The Mean Of Economic Growth:”

“After the ‘Financial Crisis,’ the media buzzword became the ‘New Normal’ for what the post-crisis economy would like. It was a period of slower economic growth, weaker wages, and a decade of monetary interventions to keep the economy from slipping back into a recession.

Post the ‘Covid Crisis,’ we will begin to discuss the ‘New New Normal’ of continued stagnant wage growth, a weaker economy, and an ever-widening wealth gap. Social unrest is a direct byproduct of this “New New Normal,” as injustices between the rich and poor become increasingly evident.

If we are correct in assuming that PCE will revert to the mean as stimulus fades from the economy, then the ‘New New Normal’ of economic growth will be a new lower trend that fails to create widespread prosperity.”

As shown, economic growth trends are already falling short of both previous long-term growth trends. The Fed is now talking about slowing economic activity further in its inflation fight.

The reason that slowing economic growth, and killing inflation, is critical for the Fed is due to the massive amount of leverage in the economy. The chart below shows the total economic system leverage versus GDP. It currently requires $4.82 of debt for each dollar of inflation-adjusted economic growth.

The problem comes if inflation remains elevated and interest rates adjust to higher levels. Such would trigger a debt crisis as servicing requirements increase and defaults rise. Historically, such events led to a recession at best and a financial crisis at worst.

As Ron Insana recently stated;

“[Bullard’s] ‘7% solution’ is, in my view, completely and utterly absurd. Raising rates by up to three full percentage points from the Fed’s current target range of 3.75% to 4% would ensure a very deep recession. It would ensure that something somewhere breaks, risking a systemic market or economic event that will shake the financial markets or the economy to their very core.”

History suggests that such would indeed be the case.

Wash, Rinse & Repeat

The rise and fall of stock prices have little to do with the average American and their participation in the domestic economy. Interest rates are an entirely different matter. Since interest rates affect “payments,” increases in rates quickly negatively impact consumption, housing, and investment, which ultimately deters economic growth. 

Given the already massive levels of outstanding debt and consumers now piling into credit card debt to offset spikes in living costs, the surge in rates will cause a reversion in consumption. Such will inevitably lead to a reversal of monetary policy, as seen repeatedly over the last decade, to offset the deflation of asset markets.

Of course, such leads to the repetitive cycle of Federal Reserve interventions.

1. Monetary policy drags forward future consumption leaving a void in the future.

2. Since monetary policy does not create self-sustaining economic growth, ever-larger amounts of liquidity are needed to maintain the same activity level.

3. The filling of the “gap” between fundamentals and reality leads to economic contraction.

4. Job losses rise, the wealth effect diminishes, and real wealth reduces. 

5. The middle class shrinks further.

6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption. 

7. Wash, Rinse, Repeat.

If you don’t believe me, here is the evidence.

“Through the end of Q3-2022, using quarterly data, the stock market has returned almost 184% from the 2007 peak. Such is more than 6x GDP growth and 2.4x the increase in corporate revenue. (I have used SALES growth in the chart below as it is what happens at the top line of income statements and is not AS subject to manipulation.)“

The critical takeaway is that while the Fed’s policy of low-interest rates pushed capital into the financial markets, it did so at the expense of economic growth. The debt accumulation needed to sustain a “living standard” has left the masses dependent on low rates to support economic activity.

Most likely, the Fed’s “7% solution” will solve the inflation problem caused by the massive stimulus injections following the pandemic. Unfortunately, the medicine will most likely kill the patient in the process.

There was a general sense of foreboding ahead of today’s jobs report, because as we wrote in our payrolls preview, several strategists noted that there was virtually no number that would be good for risk assets. As Goldman trader John Flood said, “whispers into December’s jobs print are creeping higher as we have already gotten 4 strong labor data points this week… We are still in a good data is bad for stocks set up but the new spin is that really bad data is also bad for stocks. AKA risk is skewed to the downside.” Meanwhile Bloomberg’s Heather Burke writes that the “median estimate for the change in non-farm payrolls is 202k versus a prior 263k and for the unemployment rate to stay steady at 3.7%. But the Fed’s own estimate is for the unemployment rate to shoot up to 4.6% this year. Until we get there, there is not going to be an alignment of demand with supply, which will compel the Fed to stay hawkish with no chance of a pivot.“

So with that in mind, here is what the BLS reported moments ago:

In December, payrolls rose 223K, which was down from last month’s downward revised 256K and also the lowest since the negative December 2020 print, but was above the consensus estimate of 202K.

If payrolls were stronger than expected, the unemployment was especially hot, sliding from a downward revised 3.6% (was 3.7% previously) to 3.5%, the lowest since September, even as the unemployment rate for Blacks and Hispanics did not drop, even as white unemployment hit a record low.

The underemployment rate was also notably, sliding from 6.7% to 6.5%, a record low.

But the big outlier in today’s report was not in jobs but in wages, as the average hourly earnings rose just 0.3% M/M in December, down from 0.6% previously (revised to 0.4%) and below the 0.4% expected. On an annual basis, hourly earnings rose just 4.6%, down from last month’s 5.1%, which was also revised sharply lower to 4.8%. This was the slowest wage growth since August 21.

Developing

Tesla shares fell more than 6% in premarket trading as the carmaker announced another round of price cuts in the Chinese market that now makes a Model Y sport utility vehicle price significantly cheaper than ones sold in the US. 

Bloomberg first noticed the price cuts of the locally built Model Y on the company’s Chinese website. The price plunged to a new low of 259,900 yuan ($37,875) from 288,900 yuan ($42,106). This means that the standard-range Model Y is now 43% less than the most basic Model Y made in the US. The Model 3 was also cut to 229,900 yuan ($35,500) from 265,900 yuan ($38,750), about 30% cheaper than the standard version sold Stateside. 

China’s increasingly crowded EV market in October forced Tesla to slash vehicle prices. Domestic EV companies such as BYD Co., Xpeng Inc., and Nio Inc. are increasing market share, threatening Tesla’s dominance in the Asian market. International carmakers, such as Porsche AG and Mercedes Benz Group AG, also grow EV sales in the region. 

Traders found the price cuts as more bearish news as the global EV market cools. Tesla’s shares fell 6.4% to $103.25 in premarket trading. 

Twitter users also pointed out that the carmaker has no new models planned for the Chinese market this year. Where is that Cybertruck?

These are really big price cuts for Tesla in China. What’s worse is that Tesla has NO NEW MODELS even PLANNED for that market. https://t.co/Slu8UzxixB

— Taylor Ogan (@TaylorOgan) January 6, 2023

The latest total deliveries from Tesla in the fourth quarter were 405,278 vehicles but missed Wall Street estimates. 

Tesla is facing a significant demand problem that could continue pressuring shares lower. 

US equity futures struggled to maintain gains on Friday as traders awaited the December jobs report that will help chart the path forward for Fed monetary tightening. Contracts on the Nasdaq 100 and the S&P 500 were unchanged at 7:15am ET, erasing earlier gains sparked by a report that China was planning to relax restrictions on developer borrowing, and dial its stringent “three red lines” policy that exacerbated one of the biggest real estate meltdowns in the country’s history. US equities dropped on Thursday as separate data showed the labor market remained strong. European markets were steady as data showed euro-area inflation returned to single digits for the first time since August. Treasury 10-year yields steadied after climbing for the first time this week on Thursday following comments from Fed officials, while a  measure of dollar strength climbed for a second day, as the yen fell to levels not seen in a week, after the Bank of Japan unveiled further unscheduled bond buying to control its yield curve.

Among notable movers in premarket trading, Tesla tumbled as the electric-car maker made another round of price cuts on its Model 3 and Y electric vehicles in China. Bed Bath & Beyond dropped after the home furnishings retailer began preparing for a bankruptcy filing, also weighing on shares of other retail trader favorites. Here are other notable premarket movers:

• Apple is little changed as Morgan Stanley says the stock could fall further on worries over wilting demand and production snags.
• Alvotech & Teva Pharmaceuticals say the U.S.  Food and Drug Administration has accepted for review a Biologics License Application for AVT04, Alvotech’s proposed biosimilar to Stelara, which is prescribed to treat a variety of inflammatory conditions. Alvo shares gain 6.4%, Teva rises 0.4% in light trading.
• Atai Life Sciences (ATAI) says it may explore steps including strategic partnership options after its Phase 2a trial of PCN-101 (R-ketamine) for treatment-resistant depression missed its primary endpoint. Shares sink 45%.
• Bed Bath & Beyond (BBBY) slumps 13% after the home furnishings retailer began preparing for a bankruptcy filing, also weighing on shares of other retail trader favorites.
• CytomX (CTMX) surges 64% as analysts raised their price targets on the biotech after reporting a research collaboration agreement with Moderna, which brokers said demonstrated the strength of CytomX’s platform. Separately, CytomX gave an update on a phase 2 study for its CX-2029 treatment, which brokers said was mixed.
• Fate Therapeutics (FATE) tumbles 53% after the biotech company terminated a collaboration deal with Janssen Biotech and said it would discontinue its FT596 product candidate. Several analysts slashed their share price targets, with Cantor Fitzgerald describing Fate’s moves as major setbacks.
• Graphite Bio Inc. (GRPH) plunges 50% as it pauses a study of its experimental gene therapy for sickle cell disease after the first patient had a serious adverse event, prompting at least two analysts to downgrade the stock.
• Molson Coors (TAP) upgraded to outperform at Cowen with the group seen on a strong footing for 2023, while peer Constellation Brands is cut to market perform on downtrading challenges. TAP gains 1.4% in light trading.
• Novocure (NVCR) shares fall 6.4% as Wells Fargo cuts the stock to equal- weight from overweight with its positive thesis on the oncology firm now played out.
• Sight Sciences Inc. (SGHT) shares are up 2.8% after Stifel upgraded the medical device company to buy from hold, seeing a positive near-term setup for the stock.
• Tesla (TSLA) shares fall 6% as the electric-car maker makes another round of price cuts on its Model 3 and Y electric vehicles in China.
• World Wrestling Entertainment (WWE) shares rise 10% after controlling shareholder and former CEO Vince McMahon sought to return to the company and is proposing a possible sale of the business.
• Zynex (ZYXI) is upgraded to overweight from neutral at Piper Sandler, which notes strong execution from the medical device maker and sees room for possible multiple expansion. Shares gain 1.5%.

After their worst annual drop since 2008 and a record underperformance against European stocks in the fourth quarter, US equities began the new year with further declines amid signals from the Fed that it remains staunchly hawkish until inflation cools further. The next clue will in today’s December jobs report, with Bloomberg Economics expecting a more subdued increase in employment. Estimates for US nonfarm payroll numbers peg a decline in new jobs added, indicating a cooling in the labor market that would in turn reduce the need for higher interest rates. Median estimate for December nonfarm payrolls change is 202k (vs crowd-sourced whisper number 243k), while average hourly earnings are expected to increase 0.4% vs 0.6% in November. However, private payrolls figures out on Thursday surpassed estimates and a surprise drop in new claims for unemployment benefits underscored a robust jobs market. Our full preview can be found here.

“Investors are still highly sensitive to the direction of monetary policy and this has potential to cause fresh headwinds for valuations,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. Any indications of resilience in the labor market or stubborn inflation “are likely to send fresh jitters through stocks,” she said.

The Fed has remained “extremely hawkish” to avoid unintentionally easing financial conditions, said Craig Erlam, senior market analyst at Oanda. “But another strong jobs report today would further justify such a hawkish approach and perhaps send risk assets into a bit of a tailspin as the prospect of a higher terminal rate increases alongside recession risks,” he wrote in a note.

Overnight, Citi strategists led by Robert Buckland cut US shares to underweight on the grounds that earnings expectations are still too optimistic. Meanwhile, the latest EPFR fund flows data showed investors continued to flock to cash and out of equities in the week through Jan. 4. Inflows into money market funds were at $112 billion for the week – the most since April 2020, when the pandemic was spreading globally – as equity fund outflows continued.

Market pricing for US interest rates to peak in June rose to above 5% following comments from Atlanta Fed President Raphael Bostic, who said the central bank still has “much work to do” to tame inflation. St. Louis Fed President James Bullard, who is no longer a voting member of the Federal Open Market Committee, said rates were approaching a sufficiently restrictive zone and that inflation expectations had retreated, offering investors some optimism.

In Europe, energy and miners outperformed while financial services and autos lag. The Euro Stoxx 50 was steady with FTSE MIB outperforming peers, adding 0.4%. Here are some of the biggest European movers today:

• Shell shares gain after the oil and gas group reported higher gas trading in 4Q, though analysts said its update looks “mixed.” Shares rise as much as 1.3%.
• Nel shares gain as much as 5.9% in Oslo after agreeing with HH2E for FEED (Front End Engineering and Design) study and Letter of Intent for two 60 MW electrolyser plants.
• Small-cap UK stock Nanoco rises a record 69% in London, after the company said it had settled its litigation with Samsung ahead of a trial that was due to start today.
• Shares in British shipping company Clarkson rise as much as 9.2%, with Liberum anticipating “strong” 2022 results that will be ahead of current market expectations, including at least £98m profit before tax.
• Standard Chartered shares fall as much as 2.8% after analysts said they consider a takeover of the London-listed lender as unlikely given the “deal complexity,” with JPMorgan analyst noting that such a transaction would require “a number of regulatory approvals.”
• Sodexo shares lost as much as 3% after the French catering and services group reported fiscal first- quarter revenue that beat the average analyst estimate but left limited upside after the stock rallied close to 50% in 2H 2022.
• Rentokil Initial shares drop as much as 5.2% after Exane BNP Paribas initiated coverage with a recommendation of underperform.
• Danone shares fall as much as 2.8% after Morgan Stanley makes a number of changes to its order of preference within the sector, including a lower rating on Diageo to equal- weight, Danone to underweight.

Earlier in the session, Asia stocks rose in the first week of trading in 2023 amid optimism over China’s reopening and a potential bottoming out of earnings in the chip sector. The MSCI Asia Pacific Index advanced as much as 0.8% Friday before paring gains to 0.1%, led by South Korea. Samsung’s worst profit fall in more than a decade cemented expectations of capex cuts and a price boost from reduced chip supplies, supporting sentiment for the sector. China’s CSI 300 Index rose for a fifth day while Hong Kong stocks retreated after a recent rally. The nation is set to reopen its borders to international travelers on Sunday. It’s also planning to relax restrictions on developer borrowing, dialing back the stringent “three red lines” policy that exacerbated its real estate meltdown. China’s Consumer Sentiment Rebounds as Economy Reopens: Chart The Asian stock benchmark is on track for its longest winning streak since September 2021. The gains came ahead of the US nonfarm payroll report due later Friday. Private payrolls data released Thursday surpassed estimates, underscoring a robust jobs market. “Even though the US Fed is expected to remain hawkish, the US economy is most likely to be resilient on the back of strong consumption,” said Daniel Yoo, head of global asset allocation at Yuanta Securities Korea. “This is a positive for Asian exporters in the medium to long term.”

Japanese equities erased their morning losses to close higher, as the weakening yen boosted exporting companies.  The Topix Index rose 0.4% to 1,875.76 as of market close Tokyo time, while the Nikkei advanced 0.6% to 25,973.85. Sony Group Corp. contributed the most to the Topix Index gain, increasing 2.4% as analysts were positive on announcements at the Consumer Electronics Show on new products including its self-driving electric vehicle with Honda as well as PlayStation sales. Out of 2,162 stocks in the index, 1,273 rose and 768 fell, while 121 were unchanged. “The ADP jobs data exceeded market expectations, with investor worries that the Fed would continue to be hawkish, which strengthened the dollar and weakened the yen slightly in the foreign exchange market,” said Kiyoshi Ishigane chief fund manager at Mitsubishi UFJ Kokusai Asset Management. “The slightly weaker yen has softened the downside from the fall in US stocks.”

In FX, the dollar climbs 0.2% to session high ahead of the jobs report, pulling all G-10 FX lower. The yen was the biggest underperformer, falling to its lowest level against the dollar since Dec. 20, trading at ~134.26 per dollar. The Bloomberg Dollar Spot Index rose 0.2%; for the week, the gauge is up 1.2% in what’s set to be its biggest rally since the week ended Sept. 23.

• The Yen extended losses after a Bloomberg report that Bank of Japan officials see little need to rush to make another adjustment to its yield-curve control policy. USD/JPY rose as much as 0.9% to 134.59; The move came as Japan reported that real earnings declined 3.8% in November from a year earlier, the most since May 2014. “Most significant and marginally yen-negative news out of Japan was the weaker-than-expected cash and real earnings data which serves to reinforce the notion that a formal YCC policy change is far from imminent,” said NAB’s Attrill. “We don’t expect one at least until 2H 2023.”
• EUR/USD fell as much as 0.2% to 1.0497 before paring part of that drop; Data showed that euro-area inflation returned to single digits for the first time since August. While the headline inflation figure fell to 9.2%, below economists’ 9.5% forecast, a measure that strips out energy and food edged up to a record 5.2%
• The Norwegian krone is set to be the biggest loser of the week vs. dollar, down 4.4%, its worst week since April

In rates, this week’s sharp flattening move extends into early US session with long-end yields slightly richer on the day and front-end lagging, guided by wider bull-flattening move seen in the German curve following euro-zone CPI data. US yields are cheaper by up to 2bp across front-end and belly of the curve with 10-year trading around 3.725%, cheaper by 0.5bp vs Thursday’s close and lagging bunds by 3bp in the sector; bunds and UST 10-year yields are little changed, trading within Thursday’s range; comparable gilts yields underperform by about a basis point.

In commodities, oil stabilized after a string of declines that wiped nearly 10% from the price of crude. WTI up 0.8% to below $75. Gold climbed after retreating Thursday from a six-month high reached earlier in the week. Spot gold rose ~$3 to near $1,836/oz. Most base metals trade in the green.

Looking to the day ahead now, and the main data highlight will be the US jobs report for December. Otherwise in the US we’ll get the ISM services index for December and factory orders for November, whilst in Europe there’s the flash Euro Area CPI reading for December, along with German factory orders and retail sales for November. Meanwhile from central banks, we’ll hear from the Fed’s Bostic, Cook, Barkin and George, as well as the ECB’s Centeno and Lane.

Market Snapshot

• S&P 500 futures little changed at 3,825.75
• STOXX Europe 600 little changed at 438.97
• MXAP little changed at 157.70
• MXAPJ little changed at 520.71
• Nikkei up 0.6% to 25,973.85
• Topix up 0.4% to 1,875.76
• Hang Seng Index down 0.3% to 20,991.64
• Shanghai Composite little changed at 3,157.64
• Sensex down 0.8% to 59,867.28
• Australia S&P/ASX 200 up 0.7% to 7,109.59
• Kospi up 1.1% to 2,289.97
• German 10Y yield little changed at 2.31%
• Euro little changed at $1.0512
• Brent Futures little changed at $78.70/bbl
• Gold spot up 0.2% to $1,835.99
• U.S. Dollar Index up 0.34% to 105.40

Top Overnight News from Bloomberg

• China is planning to relax restrictions on developer borrowing, dialing back the stringent “three red lines” policy that exacerbated one of the biggest real-estate meltdowns in the country’s history
• The European Central Bank should complete its interest-rate increases “by the summer” and then be prepared to hold for a potentially sustained period to tame inflation that remains too high, Governing Council member Francois Villeroy de Galhau said
• Japanese workers’ real wages fell by the most in eight years, suggesting that there’s still some way to go before the central bank can achieve its wage-growth accompanied price goal. The Bank of Japan resumed additional bond buying operation after a new benchmark bond yield touched its 0.5% ceiling
• Japan wants the Group of Seven advanced economies to take a coordinated approach this year aimed at preventing the “economic coercion” that China has applied to some of its trading partners
• Mexico’s Finance Ministry nominated Banxico adviser Omar Mejia Castelazo to the central bank’s board, an unexpected choice to replace its most dovish member Gerardo Esquivel
• China’s trade restrictions on Australian wine, lobsters and other commodities could be the next to ease amid a warming of diplomatic ties and expectations that Beijing will soon resume imports of coal
• The US House adjourned as Kevin McCarthy’s allies tried to strike a deal with members of the group who’ve blocked the California Republican from being elected speaker in a historic 11 rounds of voting

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mostly with cautious gains despite a negative lead from Wall Street, and ahead of the US labour market data. ASX 200 saw gains across the Metals, Mining and Resources names, but the upside was capped by the Healthcare and Tech sectors. Nikkei 225 briefly topped the 26k level whilst the banking sector underperformed after Thursday’s sectoral outperformance. Hang Seng and Shanghai Comp were firmer with the former initially bolstered by property names, with source reports from Bloomberg flagging further housing market easing measures, although the earlier gains faded throughout the session.

Top Asian News

• BoJ reportedly sees little need to rush major yield adjustments, according to Bloomberg sources
• BoJ to conduct emergency bond buying for 5yr and 10yr maturities, according to Reuters.
• China could ease “three red lines” property rules in a major shift, according to Bloomberg sources. It will allow some property firms to add more leverage, and it pushes back the grace period for meeting debt targets, whilst deadlines may be extended by at least six months.
• PBoC drained a net CNY 1.6tln for the week via OMO – the largest weekly net cash withdrawal on record, according to Reuters.
• PBoC injected CNY 2bln via 7-day reverse repos with the rate maintained at 2.00%; daily net drain CNY 384bln
• Samsung Electronics (005930 KS) Prelim Q4 (KRW): Revenue 70tln (exp. 71tln), Operating Profit 4.3tln (exp. 5.9tln, BBG exp. 6.65tln); Memory chip demand fell more than expected in Q4 amid clients’ concerns on consumer sentiment. Smartphone sales fell in Q4 due to demand weakness from macro issues. Price of memory chips fell continuously in Q4 due to chipmakers’ increased inventory, according to Reuters.
• China has released the 10th edition of COVID prevention and control protocols, will further optimise clinical catergorisation and treatment method. Adds positive antigen tests as a diagnostic standard.
• Evergrande (3333 HK) to hold a meeting with offshore bondholders on Wednesday, to discuss debt restructuring proposals, via Reuters citing sources.

European bourses are little changed overall but do feature a slim positive skew, Euro Stoxx 50 +0.1%, pre-NFP. US futures are similarly contained with modest divergence around the unchanged mark, ES +0.1%, with attention on the NFP print, subsequent ISM Services PMI and Fed speak thereafter. Tesla (TSLA) to cut Model 3 & Y prices in China, Japan and South Korea according to reports. Subsequent Reuters sources state price cuts outside of China are being done with a view to support plant output. Citi (C) equity updates: cuts US to Underweight, raises continental-Europe to Overweight, raises Australia to Neutral.

Top European News

• German Chancellor Scholz to invite the auto industry for talks on Tuesday, to discuss supply chains, mobility and climate.
• Lufthansa to Revive Aging A340s Amid Dearth of First Class Seats
• UK House Prices May Decline by 8% This Year, Halifax Says
• German Factory Orders Plummet as Manufacturers Under Siege
• Stellantis May Shut More Plants as Electrification Costs Bite

FX

• DXY maintains its recovery momentum ahead of the US agenda with the index up to a 105.52 peak at best.
• Though, it has slipped a touch from this in wake of hotter-than-expected core EZ inflation, sending EUR/USD more comfortably above 1.05, though shy of initial best levels.
• JPY has taken the brunt of the USD’s resurgence amid reports that the BoJ sees little need for further hasty YCC tweaks, with USD/JPY surpassing 134.50.
• More broadly, peers are down across the board vs the USD, though to varying degrees with the overall tone somewhat tentative pre-NFP.
• PBoC set USD/CNY mid-point at 6.8912 vs exp. 6.8914 (prev. 6.8926)

Fixed Income

• Bunds experienced modest but ultimately fleeting downside in wake of the hot core/super-core EZ inflation print, sending the German benchmark to a 135.74 low.
• Albeit, the move pared back in short order with EGBs and USTs lower to the tune of around 10/15 and 5 ticks respectively ahead of the PM agenda.
• Australian government cuts FY22/23 bond issuance by AUD 10bln vs original plans, according to reports.

Commodities

• Crude benchmarks are firmer, but have been subject to two-way price action throughout the morning which has been directionally in-fitting with but slightly more pronounced than equity action.
• Currently, WTI Feb’23 and Brent Mar’23 are posting gains just shy of 1.0% as the upside stalled a touch around USD 0.30/bbl shy of the USD 75/bbl and USD 80/bbl handles respectively.
• China Energy has reportedly placed an order for Australian coal – among the first deals since the 2020 unofficial ban, according to Reuters sources.
• Spot gold is modestly firmer though is yet to recoup all of the marked downside seen in yesterday’s session, which saw the yellow metal surrender the USD 1850/oz handle.

Geopolitics

• US and Japan to hold security talks in Washington on January 11th, according to Bloomberg.
• Russian State TV says the ceasefire has come into force along the entire front in Ukraine; in-fitting with the order from President Putin.
• Turkish Defence Minister says Greece is carrying out acts of incitement against us, and we did not get a positive response from them regarding the establishment of a dialogue, via AJ Breaking.

US Event Calendar

• 08:30: Dec. Change in Nonfarm Payrolls, est. 202,000, prior 263,000
  • Change in Private Payrolls, est. 182,000, prior 221,000
  • Change in Manufact. Payrolls, est. 8,000, prior 14,000
  • Unemployment Rate, est. 3.7%, prior 3.7%
  • Labor Force Participation Rate, est. 62.2%, prior 62.1%
  • Underemployment Rate, prior 6.7%
  • Average Weekly Hours All Emplo, est. 34.4, prior 34.4
  • Average Hourly Earnings MoM, est. 0.4%, prior 0.6%
  • Average Hourly Earnings YoY, est. 5.0%, prior 5.1%
• 10:00: Nov. Factory Orders, est. -1.0%, prior 1.0%
• 10:00: Nov. Durable Goods Orders, est. -2.1%, prior -2.1%;
  • Less Transportation, prior 0.2%
  • Nov. Cap Goods Ship Nondef Ex Air, prior -0.1%
  • Nov. Cap Goods Orders Nondef Ex Air, prior 0.2%
  • Nov. Factory Orders Ex Trans, prior 0.8%
• 10:00: Dec. ISM Services Index, est. 55.0, prior 56.5

Central Bank Speakers

• 11:15: Fed’s Cook Takes Part in Panel Discussion on Inflation
• 11:15: Fed’s Bostic and ECB’s Lane Discuss the Global Economic…
• 12:15: Fed’s Barkin Speaks on the Economic Outlook
• 13:00: Fed’s George Discusses the Economic Outlook
• 15:30: Fed’s Bostic Discusses Lessons From the Pandemic

DB’s Jim Reid concludes the overnight wrap

Following a strong start to 2023, markets finally fell back yesterday after strong US data and hawkish remarks from Fed officials led investors to price in more rate hikes over the months ahead. The initial catalyst came from the ADP’s report of private payrolls, which showed an unexpectedly strong gain in December of +235k (vs. +150k expected), whilst the previous month was also revised up to +182k (vs. +127k previously). Treasury yields began to rise immediately after that release, which was then followed up by the jobless claims data, which showed that initial claims had fallen to a 3-month low of just 204k in the last week of 2022 (vs. 225k expected). So further evidence pointing to a tight labour market, particularly when you consider the JOLTS report for November from the previous day. Claims likely showed some seasonal distortion but there is little doubting the still strong labour market.

That focus on the labour market will continue today, since we’ll get the US jobs report for December at 13:30 London time. In terms of what to expect, our US economists are looking for nonfarm payrolls to have grown by +175k in December, which should keep the unemployment rate steady at 3.7%. Keep an eye on average hourly earnings growth as well, particularly given the Fed’s focus on wage inflation. Our economists are expecting that to step down to +0.3%, having come in at a 10-month high of +0.6% last month.

In the meantime, these signs of strength in the labour market data led investors to price in a more aggressive path of rate hikes from the Fed yesterday. For instance, the chances they’ll continue hiking by 50bps at the next meeting in February now stand at 44.2% according to futures, which is up from 32% the previous day. And looking further out, the terminal rate priced in for June hit a 6-week high of 5.03% (cycle high 5.146% – Nov 3rd), with the year-end rate for December also up +13.6 bps to 4.67%.

Those views on the future policy path were given added support by the latest speakers from the FOMC. For instance, Kansas City Fed President George said that the Fed should keep rates above 5% into 2024, and Atlanta Fed President Bostic said that inflation was still “way too high”. St. Louis Fed President Bullard last night spoke a little more dovishly when he said that “the policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer.” In a presentation, Bullard cited the recent FOMC dot plot showing the median projection of 5.1% as being adequately restrictive.

Notwithstanding Bullard, the overall backdrop yesterday meant that the sovereign bond rally so far this year came to a halt, with yields on 10yr Treasuries up by +3.5bps to 3.718%. That was echoed in Europe, where yields on 10yr bunds (+4.4bps), OATs (+4.5bps) and BTPs (+5.4bps) all moved higher on the day as well. The moves were driven by higher real yields, with the US 10yr real yield up +1.0bps to 1.49%, whilst the German 10yr real yield was up +10.4bps. Yields on 10yr USTs are fairly stable in the Asian session as we go to press.

For equities it was a similarly downbeat picture, with the S&P 500 (-1.16%) moving back into negative territory for 2023, with losses for both the NASDAQ (-1.47%) and the Dow Jones (-1.02%) as well. The main exception to that pattern were energy stocks (+1.99%), which were aided by the rebound in oil prices yesterday that saw WTI (+1.14%) back at $73.67/bbl. This morning, oil prices continue to build on their previous gains with Brent futures (+1.02%) trading just below $80/bbl and WTI (+1.06%) at $74.45/bbl. Otherwise it was a poor performance across the board however, and Europe’s STOXX 600 (-0.20%) lost ground for the first time this year, even as it continued its relative outperformance against the US indices with a c.5pp gap opening up in the first few days of the year.

Asian stock markets are generally trading higher this morning, but Chinese related equities have gone from positive to slightly negative as I finish this off. Elsewhere, the Nikkei (+0.42%) and the KOSPI (+0.66%) are losing a bit of momentum after a much more positive first half of the session. Outside of Asia, US stock futures are indicating a positive start with contracts on the S&P 500 (+0.31%) and the NASDAQ 100 (+0.27%) edging higher ahead of the December jobs report, but again off their highs.

Early morning data showed that real wages in Japan (-3.8% y/y) fell by the most in eight years and declined for the eighth consecutive month in November (v/s -2.8% expected). It followed the prior month’s revised drop of -2.9%. At the same time, cash earnings (+0.5% y/y) were also disappointing in November (v/s +1.7% expected) against a downwardly revised +1.4% rise in October. In addition, Japan’s services sector activity remained in expansion territory as the final au Jibun Bank services PMI advanced to 51.1 in December following a reading of 50.3 in November.

For a third straight day, the US House of Representatives was not able to vote in a new speaker. GOP leader Kevin McCarthy was not able to get Republicans to coalesce around him through another 5 ballots yesterday, taking the overall failed ballot count to 11. This is now the most ballots it has taken in order to elect a new Speaker since 1860. McCarthy had reportedly offered the holdouts one of their bigger demands – allowing any single member to bring forward a motion to vote on ousting the speaker, currently it takes half of the chamber. It would still take 50% of the chamber to remove the speaker, but it raises the risks of disorder around important votes. There continues to be a group of 6 or so Republicans who have declared themselves “Never-Kevin”, which complicates matters as the Republican leader can only afford 5 defections. Some McCarthy supporters have acknowledged that this process could extend into the weekend or longer if the party must find a new consensus candidate.

Otherwise on the geopolitical side, yesterday brought an announcement from Russia that there would be an unexpected ceasefire in Ukraine for 36 hours over today and tomorrow. The move coincides with Russian Orthodox Christmas and Putin asked Ukraine to reciprocate, but the request was rejected and Ukrainian presidential aide Mikhailo Podolyak said that Russia “must leave the occupied territories – only then will it have a “temporary truce”.”

Finally on the data side, Italian CPI fell to +12.3% in December on the EU-harmonised measure, which was in line with expectations but down from +12.6% in November. That comes ahead of the flash CPI release for the entire Euro Area today, where economists are widely expecting the year-on-year measure will decline for a second consecutive month.

To the day ahead now, and the main data highlight will be the US jobs report for December. Otherwise in the US we’ll get the ISM services index for December and factory orders for November, whilst in Europe there’s the flash Euro Area CPI reading for December, along with German factory orders and retail sales for November. Meanwhile from central banks, we’ll hear from the Fed’s Bostic, Cook, Barkin and George, as well as the ECB’s Centeno and Lane.

Russia’s unilaterally declared Christmas ceasefire has now been in effect for four hours, as it began at noon Moscow time. While multiple explosions were reported in Kherson an hour before the ceasefire, reportedly killing one and leaving four injured, and there was shelling in Kramatorsk (Donetsk) region, there have been no reports of significant exchange of fire since noon (local time).

Russian state media on Friday announced, “At noon today, the ceasefire regime came into force on the entire contact line,” according to national broadcaster Channel One. “It will continue until the end of January 7.”

The 36-hour ceasefire was initially urged by Russian Orthodox Patriarch Kirill, before hours later being officially ordered by Putin, but which was swiftly rejected by both Kiev and Washington as a “cynical ploy” and “trap” – which they fear will allow Russian forces to regroup.

However, the Russian side described that it is to allow Orthodox believers to attend Christmas church services, which in the Eastern Orthodox Slavic lands falls on Jan.6th (Christmas Eve) through Jan.7th.

Still, Ukrainian authorities are urging citizens in occupied areas to not attend church services today or tomorrow on fears that attack on places of worship will occur. 

Ukraine’s deputy prime minister Iryna Vereshchuk has claimed that Russian forces are planning a ‘false flag’ attack. “Ukraine has received information that Russians are preparing terrorist attacks in churches,” Vereshchuk said Friday.

According to more in Sky News:

This morning, Ukrainian open source intelligence group InformNapalm reported getting tip-offs about planned false-flag attacks in churches in occupied territories. 

A false-flag attack is aimed at putting the blame on the other party – so it would be an attempt to make Ukraine appear as if it is breaking the current temporary ceasefire. 

As has at times been the case throughout the conflict, once these claims of “false flag is coming” begin circulating, it is to presage to an actual event around the corner. In this case, any strike on or near church grounds would certainly shatter the fragile unilateral truce – and would without doubt be immediately blamed on the Russian side.

Pro-Russian fighters in Donbas said they came under shelling attack just as the ceasefire went into effect:

⚡️#BREAKING Donetsk authorities: Ukrainian forces shelled the Petrovsky neighborhood of Donetsk with 6 artillery shells as the truce began

— War Monitor (@WarMonitors) January 6, 2023

Meanwhile, the Pentagon says it is “deeply skeptical” about Putin’s intent in calling for the 36-hour ceasefire. “I think that there’s significant scepticism both here in the US and around the world right now, given Russia’s long track record of propaganda, disinformation, and its relentless attacks against Ukrainian cities and civilians,” Pentagon spokesman Brigadier General Patrick Ryder said in a press briefing. “Our focus will continue to be on supporting Ukraine,” Ryder added.

It remains to be seen, and is perhaps unlikely, that this ceasefire can go a full 36-hours; however, if it holds for a significant amount of time this could serve as a hoped-for precursor to future, possibly more permanent ceasefire leading to negotiated settlement to an end to the war.

But from a purely strategic, realpolitik perspective… it is not in Ukraine’s interest for Putin’s ceasefire to hold as Kiev doesn’t want the Russian leader to be given any credibility on the world stage, and given it would demonstrate that Moscow might be serious about openness to legitimate ceasefire talks. For these reasons the truce is unlikely to hold for the duration.

“Everyone in the world knows how the Kremlin uses respites at war to continue the war with renewed vigour”.

🇺🇦 President Volodymyr Zelenskyy claims Russia’s planned ceasefire over Orthodox Christmas is a cover to halt Ukraine’s advance to liberate occupied territories. pic.twitter.com/lc7irCslFC

— euronews (@euronews) January 6, 2023

After all, Zelensky already charged that the pause in fighting is a mere ploy for Russian forces to regroup and to take momentum away from the Ukrainian counteroffensive. Hearing this from their commander-in-chief gives the Ukrainian army little reason to refrain from proceeding with attacks on the Russian front lines throughout the weekend.

Overnight trading in Japan saw a landmark event pass quietly into the history books.

For the first time since 2014, there are no negative-yielding bonds in the world…

From a peak of $18.4 trillion in December 2020 (and over 4000 bonds with a negative yield), the experiment in financial repression is over… for now…

Will we ever see the 2014-2022 era again?

As Deutsche’s Jim Reid notes, before this point most people would have thought negative-yielding debt was an inconceivable concept.

While there is no value in buying negative yielding debt, especially in a fiat world where inflation will always likely be positive, you can’t rule out central banks having to buy large amounts of debt again in the future.

However, for now this looks set to be the welcome end of an era as some value returns to global fixed income.

Via Eurasia Group,

Top Risks is Eurasia Group’s annual forecast of the political risks that are most likely to play out over the course of the year. This year’s report was published on 3 January 2023.

Download the full report here…

OVERVIEW

We’re (mostly) through the pandemic. Russia has no way to win in Ukraine. The European Union is stronger than ever. NATO rediscovered its reason for being. The G7 is strengthening. Renewables are becoming dirt cheap. American hard power remains unrivaled. Midterms in the United States were decidedly normal … and many of the candidates posing the biggest threat to democracy (especially those who would have had authority over elections) lost their races. Meanwhile, Donald Trump is the weakest he has been since he became president, with a large number of Republicans preparing to take him on for the GOP nomination.

There’s got to be a catch.

The big one: A small group of individuals has amassed an extraordinary amount of power, making decisions of profound geopolitical consequence with limited information in opaque environments. On a spectrum of geopolitics with integrated globalization at one extreme, these developments are at the other extreme, and they’re driving a disproportionate amount of the uncertainty in the world today.

Our top risks this year are skewed toward these actors and their impact: Rogue Russia, Maximum Xi, Weapons of mass disruption, and Iran in a corner all come from international actors facing severe structural challenges and strong opposition (internal and/or external) in achieving their desired goals, with neither oversight, adequate expert inputs, nor checks and balances constraining their actions. 

Dictatorships are stumbling at the same time that they’re becoming more consolidated. Vladimir Putin’s Russia is too isolated for its leader to attend the G20 summit, facing serious economic and military decline … while NATO has never looked stronger. Iran, Russia’s most important military ally, faces a deeply hostile geopolitical environment alongside the greatest domestic unrest since the 1979 revolution that brought the Islamic Republic to power. China was thoroughly unprepared for its troubles with zero Covid (our #1 risk last year), leading to unprecedented demonstrations … and a sudden turnaround of President Xi Jinping’s policy, ending restrictions two years after the Americans and Europeans. Their trajectories are, to varying degrees, increasingly unsustainable.

More broadly, progress in human development has been thrown into reverse by a global pandemic, a land war in Europe, a massive inflationary shock, and mounting climate catastrophe. After decades of globalization pushing unprecedented global growth and the emergence of a robust global middle class, we are now seeing a majority of the world’s 8 billion people fare worse, not better, in education levels, life expectancy, economic well-being, and safety and security. The headwinds for human development will grow in 2023.

American leadership is a double-edged sword. One year into Russia’s failed war, the United States has only gained as the world’s sole global military leader. Core allies clearly recognize their reliance on the United States for national security, broadly defined. America’s comparative economic power is stronger coming out of the pandemic and through the Russia war than after the global financial crisis in 2008. Whispering in Europe has gotten louder that the global position of the United States is benefiting from the war, while the Europeans and Japan face deindustrialization and a permanent end to the peace dividend. China, too, faces massive economic challenges, much greater than other major countries. Its economy is still expected to surpass that of the United States in GDP by 2030, but there is a growing chance it never does. And if it does, this does not herald a Chinese century as China’s population halves by 2100. If any major middle-income country is truly outperforming in the coming decades, it’s the world’s soon-to-be third largest economy (and its largest democracy), India.

But in terms of leading by example, it’s a radically different story for the United States. In 1989, the US was the world’s leading exporter of democracy. Today, it is the leading exporter of tools that undermine democracy—the result of algorithms and social media platforms that rip at the fabric of civil society while maximizing profit, creating unprecedented political division, disruption, and dysfunction. That trend is accelerating fast—not driven by governments but by a small collection of individuals with little understanding of the social and political impact of their actions.

Is the tech centibillionaire a bigger threat to global instability than Putin or Xi? It’s unclear but the right question to ask and a critical challenge for the world’s democracies, highlighting the vulnerability of representative political institutions and the growing allure of state control and surveillance. As we showed with the J Curve back in 2006, open societies were the most stable, in part because technology strengthened them and weakened authoritarian regimes. In 2023, less than two decades later, the opposite is true.

It’s not the end of democracy (nor of NATO or the West). But we remain in the depths of a geopolitical recession, with the risks this year the most dangerous we’ve encountered in the 25 years since we started Eurasia Group. 

And now, our top risks.

1. ROGUE RUSSIA

A humiliated Russia will turn from global player into the world’s most dangerous rogue state, posing a serious security threat to Europe, the United States, and beyond.

READ THE RISK

2. MAXIMUM XI

Xi Jinping emerged from China’s 20th Party Congress in October 2022 with a grip on power unrivaled since Mao Zedong.

READ THE RISK

3. WEAPONS OF MASS DISRUPTION

New technologies will be a gift to autocrats bent on undermining democracy abroad and stifling dissent at home.

READ THE RISK

4. INFLATION SHOCKWAVES

Rising interest rates and global recession will raise the risk of emerging-market crises.

READ THE RISK

5. IRAN IN A CORNER

The chance of regime collapse is low, but it’s higher than at any point in the past four decades.

READ THE RISK

6. ENERGY CRUNCH

Higher oil prices will also increase frictions between OPEC+ and the United States.

READ THE RISK

7. ARRESTED GLOBAL DEVELOPMENT

Women and girls will suffer the most, losing hard-earned rights, opportunities, and security.

READ THE RISK

8. DIVIDED STATES OF AMERICA

There is a continuing risk of political violence in the US, even as some who participated in the Capitol riots go to prison.

READ THE RISK

9. TIK TOK BOOM

Gen Z has both the ability and the motivation to organize online to reshape corporate and public policy, making life harder for multinationals everywhere and disrupting politics with the click of a button.

READ THE RISK

10. WATER STRESS

This year, water stress will become a global and systemic challenge…while governments will still treat it as a temporary crisis.

READ THE RISK

RED HERRINGS

Cracks in support for Ukraine. EU political dysfunction. Taiwan crisis. Tech tit-for-tat. 2023 Red Herrings.

READ THE RED HERRINGS

CONCLUSION

We try not to think too hard about writing a report on where the world is going (put it that way, and it feels like a daunting task). But it’s not about prediction. You start with where the world is, really is, and to the extent that you get that assessment right, it constrains more outcomes than any crystal ball ever could. In many ways, Top Risks is about the art of what’s not possible.

We learn as much about ourselves as the world in the process. What biases are we holding on to that need to be challenged? What are the things we think we know that aren’t really so? And what would make us wrong?

We hope we’ve addressed these issues—we’ve certainly tried! As always, we’ll be keeping the Top Risks on our homepage all year, so we can keep ourselves honest … and then come back in December and see how we’ve done.

In the meantime, a heartfelt thanks for your support for the 25 years since we started Eurasia Group. It’s a milestone that makes us stop for a moment. Yes, we’re older, if not wiser (though it helps that we were children when we founded this thing). We’re definitely more grateful.

Our very best wishes for our year ahead.

The price of critical material for solar panels plunged this week as supply has caught up with demand, according to BloombergNEF. 

The average cost of the highest grade of polysilicon slid another 20% this week due to oversupplied conditions. This also led to a 1% drop in solar panel prices to the lowest nominal value since May 2021. 

According to the China Silicon Industry Association, polysilicon produced in China increased to 96,700 metric tons in December 2022, 7.5% more than in the previous month. New polysilicon manufacturing capacity in China boosted domestic production in 2022 by 66%. 

BNEF analysis shows polysilicon prices are in freefall. Now at $24 per kilogram. 

The good news is that polysilicon is at the heart of manufacturing solar panels. This could mean panel prices are set to decline further.