Is the jobs market finally cooling off? Wages still rising faster than inflation
December’s jobs report showed employers added 216,000 jobs for the month while the unemployment rate held at 3.7%. Consensus estimates projected 170,000 jobs and a 3.8% unemployment rate. The hiring boost came from a gain of 52,000 in government jobs and 38,000 in health care-related fields such as ambulatory health-care services and hospitals. Average hourly earnings rose 0.4% on the month and were up 4.1% from a year ago, both higher than the respective estimates for 0.3% and 3.9%.The October and November reports were also revised lower. In 2023, job gains totaled 2.7 million or a monthly average of 225,000, down from 4.8 million or 399,000 per month in 2022.
U.S. inflation picked up slightly more than expected in December, driven primarily by higher costs for housing, car insurance, and dining. U.S. headline CPI registered at 3.4% year-over-year (Y/Y) for the month of December, 0.3% above the November figure. Meanwhile, core CPI registered at 3.9% Y/Y, a decline from the prior month’s print but still above consensus expectations. Much of the increase came due to rising shelter costs, which rose 0.5% month-over-month (M/M) and accounted for more than half the core CPI increase. Futures markets believe the Fed is finished raising rates and expect five rate cuts in 2024. Markets are currently pricing in an 82% probability of a rate cut in March with an additional five to six cuts over the course of 2024. The Fed’s dot chart has suggested only three rate cuts over the course of 2024. For Q4, the Atlanta Fed is forecasting GDP growth of 2.2%. Economists expect 1-2% GDP growth in 2024.
Manufacturing continues to show weakness, housing market ticks higher with lower rates
Manufacturing activity in the U.S. contracted at a slightly slower pace in December based on the latest ISM Manufacturing PMI reading. The headline figure of 47.4 was up from 46.7 in November and led by strength in production which rebounded back above 50. Employment also improved, but new orders and prices both weakened. Survey responses were mixed depending on the business and industry. Overall, optimism remains in place, fueled by lower inflation and interest rates. U.S. existing home sales expanded by 0.8% M/M in November while new home sales declined 12.2%. Despite optimism for future homebuying as mortgage rates decline, elevated rates may continue to affect home buyers in the near-term.
Source: CNBC, U.S. Bureau of Labor Statistics
U.S. firms expect a strong 2024 earnings rebound
2023 was a challenging year for corporate earnings growth, but U.S. companies managed expectations well and provided upside surprises. For Q4, analysts expect EPS growth of 1.9% and full year 2023 growth of 0.5%. Current estimates are positive for all four quarters of 2024 with full year expectations of 11.8% growth. The highest EPS growth is expected from the healthcare, IT, communication services, and consumer discretionary sectors. Energy is the only sector expecting a small decline in EPS growth. At 19.5x forward earnings, earnings growth will be crucial for the S&P 500 to move higher with starting valuations above the long-term average.
Will weak growth force the ECB to cut rates?
Manufacturing in the eurozone remained in contraction in December 2023 with PMIs reflecting steep declines in output and employment but an easing of the decreases in demand and purchasing. Some of the manufacturing sector sub-indices suggested that the worst of the industry’s slump had passed, with contraction in new orders and purchasing activity slowing. The HCOB Eurozone Manufacturing PMI rose slightly to 44.4 from 44.2 in November to reach a seven-month high. Eurozone earnings growth has been hovering around 0% for most of 2023 and only a mild pick up is expected in 2024, helping to cool inflation. While the ECB has held steady on its hawkish monetary policy stance, markets are pricing in five rate cuts this year starting in March.
Inflation in the eurozone fell from 2.9% in October to 2.4% in November, the lowest reading since July 2021. Annual core inflation, which excludes prices for energy, food, alcohol & tobacco, was 3.6%, the lowest reading since April 2022. Inflation is likely to pick up on account of an upward base effect for the cost of energy. In the U.K., the economy contracted 0.1% quarter-over-quarter in Q3, but headline inflation fell faster than anticipated at an annualized rate of 3.9%.
Source: S&P, MSCI, Yardeni
PMIs & deflation may force the PBOC to provide even more stimulus
While China’s official manufacturing PMI softened in December from 49.4 to 49.0, the smaller company focused Caixin Manufacturing PMI strengthened from 50.7 to 50.8. Both readings are fairly weak and signal that more monetary policy support may be necessary to revive the economy. China’s service sector sits in better shape based on the latest PMI readings. The smaller company focused Caixin Services PMI rose from 50.4 in October to 51.5 in November. The official Services PMI for China edged up to 50.4 in December 2023 from November’s 11-month low of 50.2.
China’s consumer prices declined for a third month in December with the headline reading falling 0.3% Y/Y. Services inflation increased last month in China, but pork prices continued their collapse. The producer price index fell 2.7% after a 3.0% drop in November, marking the 15th straight month of declines. With inflation under control in China and perhaps deflation taking hold, Chinese policymakers are uniquely positioned to provide additional stimulus measures to support the sluggish economy. Growth has slowed in recent years as the country grapples with its failed COVID reopening and weak external demand.
EMs are positioned to cut rates this year
While most of the focus has been on the end of the U.S. tightening cycle and when the Fed may start to lower policy rates, many EM countries are already in some type of an easing cycle. Brazil, Chile, and Poland are among EM countries that lowered rates in 2023, with many others expected to ease monetary policy in 2024. According to Bloomberg forecasts, all major EM countries are projected to cut rates in 2024, in some cases by several percentage points.
Elevated rate volatility creates opportunity
Interest rate volatility was elevated in 2023 and drove financial markets for most of the year. 2023 saw many outsized moves in Treasuries and other sovereign debt across the globe, often responding to Fed monetary policy decisions, geopolitical tensions, and significant economic data points on inflation. One surprise was that as rate volatility was surging to extreme levels, equity volatility fell throughout the year. Similar to equity volatility being a tailwind for active management and stock picking, interest rate volatility should lead to opportunities for active management in fixed income and hedge funds focused on credit and macro.
Source: Source: Bloomberg, III Capital Management
Source: Wall Street Journal. Data from 9/14/2015 to 12/14/2023
The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.