Ear to the Ground

05 January 2024

After excitement through December that interest rates look like they will be cut in the major developed markets during this year, data out this week has perhaps reminded us that nothing is necessarily plain sailing.  In the Euro area we saw inflation for December pick up, posting a year on year rise of 2.9%.  Whilst this was broadly in line with the market consensus forecast, it marked a rise on last month’s figure of 2.4%.  The rise was mainly energy related, with moderation seen in food inflation and industrial goods.

With little data out from the UK, all eyes were on the US in what was a shortened week.  The non-farm payroll figure was in focus.  This came out stronger than expected, with 216,000 jobs added in December, compared to a consensus forecast of 170,000.  There were many jobs added across many sectors, including government, leisure & hospitality and healthcare.  The unemployment rate held steady at 3.7%.

Whilst this data is positive for the jobs market, the Jolts report on the labour market posted a more sanguine picture.  Here it was reported that the hiring level had fallen below the trendline commencing in 2010.  I guess a slowdown was inevitable at some point, especially taking into consideration the low unemployment rate and aging demographics.

It wasn’t all plain sailing for data elsewhere either.  The US ISM Manufacturing Purchasing Managers Index (PMI) came in at 47.4 for December.  Whilst this was above November’s reading and the consensus forecast, a figure below 50 still indicates that manufacturing remains in a state of contraction.  The figure to catch the eye however was the number of industries within this survey who were reporting growth.  This reading is now approaching the low level seen during the global financial crisis.

Whilst the service sector remains in expansion, it is clinging on to that title by a thread.  The PMI data for December came out 50.6, below the previous reading of 52.7 and the consensus forecast of 52.6.  This suggests that the service sector is slowing down.  This could also potentially lead to service sector inflation slowing also.

Slower economic growth was something which was reflected on the recent US Federal Reserve meeting minutes from December.  Here they project that economic growth will be 1.4% in 2024, down from their previous estimate of 1.5% and 2.6% expected when figures are finalised for 2023.  At the same time, however, they acknowledged that they remain highly attentive to inflation risks.  Interest rate cuts most certainly appear on the cards for the US this year, the uncertainty could now be centred around when that first one comes and by how much will they move this year.

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