Hiring surges in December while inflation comes in cooler than expected.
The December employment report showed much stronger than expected job growth in the U.S.
- Employers added 256,000 new jobs to the economy, well ahead of the 155,000 estimate.
- The unemployment rate fell slightly from 4.2% to 4.1%.
- Average hourly earnings increased 0.3% month-over-month (M/M), which was in-line with forecasts, but the 12-month gain of 3.9% was slightly below expectations.
Revisions from October and November were small compared to the 2024 trend. The broader U6 unemployment rate edged down to 7.5%. This was definitely a hawkish report. After the report was released, markets priced in just a 68% chance of just a single rate cut in 2025.
December CPI came in below expectations with an annual headline reading of 2.9%. Inflation rose 0.4% M/M and the all-important core inflation rate rose 0.2% M/M or 3.2% year-over-year(Y/Y) — both were below expectations. Much of the move higher in the CPI came from a 2.6% gain in energy prices, pushed higher by a 4.4% surge in gasoline.
Shelter prices rose 0.3% M/M or 4.6% Y/Y while services excluding rent increased 4%, the slowest pace since early 2024. PCE inflation, the Fed’s preferred gauge, increased 2.4% Y/Y or 2.8% for core PCE per the latest report.
Source: U.S. Bureau of Labor Statistics
Consumer & business spending trends support continued strong GDP growth in 2025.
Retail sales in the U.S. increased 0.4% M/M in December 2024, following an upwardly revised 0.8% rise in November. Retail sales increased 3.9% Y/Y in December. Sales at auto dealerships rose 0.7% after accelerating 3.1% in November.
Core retail sales surged 0.7% last month and economists expect consumer spending growth to be 3.3% in the Q4 GDP report (down from 3.7% in Q3).
New orders for manufactured durable goods in the U.S. decreased 1.1% M/M in November 2024, following an upwardly revised 0.8% rise in October. Excluding transportation, durable goods fell 0.1%.
Orders for non defense capital goods excluding aircraft, a closely watched proxy for business spending, were up 0.7%, the biggest rise since August 2023.
The Eurozone economy looks weak, ending 2024 with soft PMIs and inflation that is trending higher.
Eurozone GDP grew 0.4% quarter-over-quarter (Q/Q) in Q3, above expectations and the fastest rate in over two years. Consumer spending, gross fixed capital formation, and inventories were the main contributors while net trade hurt as exports declined 1.5% versus imports that edged up 0.2%.
Germany managed to avoid recession while France expanded at a faster than anticipated rate. Spain led the way while Italy and the Netherlands showed weak GDP figures.
The eurozone composite PMI remained in contraction territory in December with a reading of 49.6, up from 48.3 in the prior month. Services rose back above 50 to a two-month high, but manufacturing fell to a one-year low. Most of the weakness came from Germany and France, the two largest eurozone economies. The rest of the eurozone posted solid increases in economic activity.
Inflation in the eurozone jumped from 2.2% in November to 2.4% in December, representing the third straight month of growth. Most of the rise has been due to the base effect, but energy costs increased 0.1% and services inflation rose 4.0% Y/Y.
- German inflation rose to 2.8% in December, up from 2.4% in November.
- French inflation inched up to 1.8%, from 1.7% in the previous month.
- Italian inflation dropped to 1.4% in December, down from 1.5% on the previous month.
- Core inflation held steady at 2.7%.
China’s GDP beats expectations, but underlying dynamics look weak and present trade risk.
China’s economy expanded a better than expected 5.4% in Q4, perhaps signaling some benefits from recently announced stimulus measures. The growth surge in Q4 allowed the economy to meet its 5.0% growth target for 2024. Retail sales increased 3.7% Y/Y in December, industrial output rose 6.2% Y/Y, and fixed asset investment rose less than expected as the drag from real estate steepened.
Unemployment ticked higher in China. A worrisome sign is the difference between domestic demand and industrial output and export-led growth. Widening trade gaps will likely only further stoke global trade tensions.
Source: LSEG Datastream
China’s official manufacturing PMI unexpectedly fell to 50.1 in December 2024 from November’s seven-month high of 50.3. December marked the third straight month of expansion in factory activity, after a series of support measures from the PBOC since late September.
The smaller company-focused Caixin Manufacturing PMI fell to 50.5 in December from November’s five-month high of 51.5. China’s official Non-Manufacturing PMI hit a nine-month high of 52.2 in December, up from 50.0 in November. The latest reading indicated that the recent flurry of stimulus measures by the PBOC may be starting to yield results, although strong headwinds remain in place.
Singapore’s economy grew by 4.3% Y/Y in Q4 of 2024, slowing from a 5.4% expansion in Q3 but exceeding market expectations of 3.8%. For the full year, the economy expanded by 4.0%, outperforming the 1.1% growth seen in 2023 and surpassing forecasts of 3.5%.
Why have long rates disconnected from short rates?
After falling for most of Q3 and the first half of Q4, intermediate and long-term Treasury yields surged higher in mid-December and again in early January.
- This backup in rates has occurred at a time when the Fed has cut short-term interest rates by 100 basis points.
- Long-term interest rates have disconnected from Fed expectations, and a simple model of the relationship shows that ten-year rates are now 40 basis points higher than what Fed expectations would have predicted.
- The worry in markets is that the additional premium in long-term interest rates is driven by fears about fiscal sustainability.
Source: Haver Analytics, Bloomberg, Apollo Chief Economist
U.S. growth expectations continue to outpace the rest of the world.
Over the past ten years, the S&P 500 has returned 13.1% which is well ahead of the MSCI EAFE return of 5.2%. The degree of outperformance in 2024 was more than 20 percentage points. A result of this strong U.S. outperformance is the increased weighting in global benchmarks. The U.S. now represents 66% of the MSCI ACWI index and we see little reason why this will change in the short-term. The U.S. continues to experience stronger economic and corporate earnings growth relative to most other developed and emerging countries.
Looking ahead to 2025, we expect stronger GDP growth in the U.S. compared to the eurozone along with a significantly stronger rebound in earnings. The main case for non-U.S. equities is cheaper valuations, but we believe that thinking is flawed as valuations are cheap for a reason and reflect the consistently weaker growth outlook.
Source: Bloomberg, Apollo Chief Economist
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