US jobs report show room for more rate hikes

The war in Ukraine has increased uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a considerable damper on globalization and further fuel higher structural inflation. 

U.S. equities declined Friday in a choppy trading session following a stronger-than-expected January labour report and some uninspiring earnings results from mega-cap stocks. Nonfarm payroll additions beat estimates by a large amount, and the unemployment rate declined, solidifying the notion of a tight job market. Meanwhile, a read on domestic services sector activity moved back into expansion territory. The Dow Jones Industrial Average declined 0.4% to 33,926, the S&P 500 Indel fell 1.0% to 4,136, and the Nasdaq Composite fell 1.6% to 12,007.  For the week, the Nasdaq rallied 4.1%, marking the fifth consecutive weekly gain, the S&P 500 added almost 2%, while the Dow lost 0.1%.   Meantime, European equity markets recovered and closed higher on Friday, with the Euro Stoxx 50 advancing by 0.4% for the day and 3.0% for the week. 

Summary as at 06.02.2023 

• Asian equity markets mostly fell on Monday as traders monitored simmering geopolitical tensions after the US military shot down a suspected Chinese spy balloon.  Shares in Australia, Hong Kong and mainland China declined, while Japanese equities gained on a weakening yen. 
• European equities are poised to drop this morning as hot US jobs report and simmering tensions between Washington and Beijing damp sentiment.  US equity futures also edged lower as investors cautiously await more earnings reports and a speech from Fed Chair Jerome Powell on Tuesday. 

• Oil prices were fractionally higher this morning as IEA Director Fatih Birol said over the weekend that China’s economy could be poised for a stronger-than-anticipated rebound that will boost demand for crude.  A European ban on seaborne imports and price caps for Russian oil products also came into effect on Sunday. 
• The Japanese yen weakened past 131 per dollar early Monday morning, hovering at its lowest levels in over three weeks amid reports that the government had approached Bank of Japan Deputy Governor Masayoshi Amamiya about succeeding Haruhiko Kuroda as central bank head. Amamiya is considered the most dovish among the potential candidates, dashing hopes that the BOJ would soon normalize monetary policy from years of ultra-easy settings.   
• A powerful earthquake struck southern Turkey and northern Syria before dawn on Monday, killing at least 200 people and trapping an unknown number of others in pancaked apartment buildings in several provinces as rescue workers raced to save them. The quake with a preliminary magnitude of 7.4 struck at a depth of 5 kilometres with an epicentre near the city of Gaziantep, according to Turkey’s Kandilli observatory based in Istanbul. 
• US nonfarm payrolls jumped by 517,000 jobs month-over-month in January, compared to expectations of a 190,000 rise, while December’s figure was upwardly adjusted at an increase of 260,000 from the initial 223,000.  The unemployment rate fell to 3.4%, compared to expectations of an increase to 3.6%.  Average hourly earnings were up 0.3% month-over-month, matching expectations and December’s reading.   
• The ISM Services PMI for the US unexpectedly jumped to 55.2 in January, rebounding sharply from over a 2-1/2 year low of 49.2 in December, and beating market forecasts of 50.4. Capacity and logistics performance continued to improve and the majority of companies indicated that business is trending in a positive direction. 

• The producer price inflation in the Euro Area eased further to 24.6% year-on-year in December, the lowest since November 2021, but coming in well above market expectations of 22.5%. The latest PPI report continued to suggest inflationary pressures across Europe will remain high for some time despite the aggressive policy tightening by the European Central Bank.  Without energy, producer prices rose 12.3% year-on-year in December, decelerating from 13.2% the month before. 
• In the US, earnings reports, Michigan consumer confidence, and trade balance data will take the spotlight this week. Also, the focus will be on the Reserve Bank of Australia and inflation data in Germany and China. Finally, the UK will be posting Q4 GDP growth figures.