Wall Street Gains on Strong US Employment Data, ECB and Fed Policy Focus Ahead

Ozge Gurses
| Dec 11, 2023

Global Markets Recap

U.S. Markets:

  • On Friday, strong employment data surpassing expectations, partially tempered expectations that the Federal Reserve’s tightening monetary policy was nearing its end. However, supported by the preliminary data of the University of Michigan Consumer Confidence Index coming in strong, and the increasing expectations of a soft landing in the economy, Wall Street indices closed the day with gains. On a daily basis, the Nasdaq index rose by 0.45%, the NYSE composite index was up 0.44%, the S&P 500 index increased by 0.41%, and the Dow Jones index by 0.36%.
  • The Dollar index closed last week with a 0.7% increase, reaching the level of 104.
  • Despite weak demand, the barrel price of Brent crude oil closed the previous week at $75.84, reflecting a 3.9% weekly decline due to evaluations suggesting that supply cuts after the OPEC+ Group meeting would not stabilize the oil market.
  • The 10-year U.S. Treasury yield completed last week at 4.23%, experiencing a 3 basis point increase. The 2-year U.S. Treasury yield, particularly responsive to Federal Reserve policy rates, closed the week at 4.73%, with a 16 basis point rise.

European Markets:

  • European stocks rose Friday, as the Stoxx Europe 600 index SXXP, closed up 0.74% to 472.23. The German DAX index increased 0.78% to 16,759.72, the French CAC 40 indexrose 1.32% to 7,526.55 and the FTSE 100 index UKX added 0.57% to 7,556.65.

Asian Markets:

  • Stocks in the Asia-Pacific region mostly grew Friday, Dec. 8. Hang Seng index down 0.1% to 16,334.37, while the Nikkei 225 index dropped 1.7% to 32,307.86. China’s Shanghai Composite index gained 0.1% to 32,307.86.
  • S&P/ASX 200 Benchmark index in Australian stock market increased 0.3% to 7,194.90.

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US Market Outlook and Economic Events

In November, the S&P Global service sector PMI increased from 50.6 to 50.8, reaching the highest level in the past four months. This suggests a slight acceleration in growth in the service sector, consistent with the leading data. Details reveal increases in production and new orders, while the rate of input price increases for companies was recorded at the slowest level in the last three years.

The ISM non-manufacturing index in November rose from 51.8 to 52.7, surpassing expectations, indicating an acceleration in growth in non-manufacturing sectors. Examining the details, there was faster growth in production, sustained strength in new orders, and a partial slowdown observed in the rate of increase in product selling prices for companies.

Looking at employment data, the ADP private sector employment increase for November, while slightly below monthly expectations, decreased from 106,000 to 103,000. Expectations, however, anticipated an increase to 130,000. Notably, the majority of private sector employment growth in November occurred in the service sector, particularly in trade, transportation, public services, education, health services, and financial services.

In the third quarter of 2023, nonfarm labor productivity increased by 5.2%, exceeding expectations, while unit labor costs decreased by 1.2%, also surpassing expectations. This decrease in unit labor costs during Q3 indicates a slowdown in inflation.

Nonfarm employment increased from 150,000 to 199,000 in November, surpassing expectations. The unemployment rate declined from 3.9% to 3.7%, reaching its lowest level since July. Average hourly earnings increased from 0.2% to 0.4%, showing the strongest monthly growth in the past four months.

The trade deficit in October rose from $61.2 billion to $64.3 billion, the highest level in the last three months. This increase was influenced by a decrease in exports and a slight increase in imports. Monthly imports reached the highest level since February, while exports decreased to $258.8 billion.

The preliminary data for the University of Michigan consumer confidence index for December increased from 61.3 to 69.4, reaching the highest level since August. Details show a rise in the current conditions sub-index and an increase in the expectations sub-index.

Consumer expectations for inflation in the coming year decreased to 3.1%, the lowest level since March 2021, while long-term inflation expectations dropped to 2.8%, the second-lowest level since July 2021.

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Upcoming US Economic Indicators

  • Fed’s Focus on Interest Rates and Powell’s Speech

This week, the focal point in the U.S. markets will be the Federal Reserve’s interest rate decision and the speech by Fed Chair Powell on Wednesday. Additionally, the Fed’s new macroeconomic projections will be released.

In the November meeting, the Fed kept the federal funds rate range unchanged at 5.25%-5.50%, aligning with expectations for the second consecutive meeting. The decision, made unanimously, emphasized the persistence of high inflation and the careful monitoring of inflation risks. Members highlighted the consideration of cumulative tightening in monetary policy, taking into account the delayed effects.

Powell, in his post-decision speech, mentioned that despite inflation being above the target, there was still a path to achieving the target sustainably. He expressed the intention to keep rates at these levels until they are sure inflation is approaching the target.


  • Inflation Data

Data crucial for shaping the Fed’s monetary policy will be closely watched, with November Consumer Price Index (CPI) expected on Tuesday and Producer Price Index (PPI) on Wednesday.

In October, headline CPI remained unchanged, with expectations for a 0.1% monthly increase. Year-on-year, headline CPI decreased from 3.7% to 3.2%, below the anticipated 3.3% increase. Core CPI slowed from a 0.3% monthly increase to 0.2%, with the year-on-year rate dropping from 4.1% to 4%, the lowest in the last two years.

In October, headline Producer Price Index (PPI) showed a 0.5% monthly decline, with the year-on-year rate decreasing from 2.2% to 1.3%.


  • Anticipated Movements in November Inflation Data

For November, the headline CPI is expected to remain flat on a monthly basis, maintaining a slight decrease in the year-on-year rate from 3.2% to 3.1%. Core CPI is projected to see an increase in the monthly growth rate from 0.2% to 0.3%, with the year-on-year rate staying at 4%.

Headline PPI is anticipated to register a 0.2% monthly increase in November, with a decrease in the year-on-year rate from 1.3% to 1.0%. Core PPI is expected to show a 0.2% monthly increase, with a year-on-year decrease from 2.4% to 2.3%.


  • Retail Sales

Thursday will see the release of November retail sales data, providing signals about the trend in domestic demand. After a 0.1% decline in October, retail sales are expected to decrease by 0.1% again in November.


  • Weekly Unemployment Claims

Thursday will also bring the weekly new jobless claims data, offering insights into the employment market. The historically low levels seen recently indicate continued tightness in the labor market.


  • Manufacturing and Service Sector PMIs

On Friday, S&P Global Manufacturing and Services PMI data for December will be released, providing signals about the current state of economic activity.

Manufacturing PMI is expected to show a slight acceleration in contraction, decreasing from 49.4 to 49.2. Services PMI is expected to indicate a mild slowdown in growth, declining from 50.8 to 50.7.


  • New York Fed Empire State Manufacturing Index

The December data for the New York Fed Empire State Manufacturing Index, signaling the trajectory of manufacturing, will be observed on Friday. While the index is expected to decrease from 9.1 to 6, it is anticipated to remain in the growth zone.


  • Industrial Production and Capacity Utilization

Friday will also bring data on industrial production and capacity utilization for November, providing insights into the trajectory of production. After a significant contraction in October, a partial rebound is expected in November with a 0.2% increase in industrial production. Capacity utilization is projected to show a slight uptick from 78.9% to 79.0%.


  • Bank of Canada’s Interest Rate Decision

The Bank of Canada kept its policy rate steady at 5%, the highest level since 2001, aligning with expectations and signaling a pause in rate hikes for the past three months. The Bank acknowledged signs that the policy has moderated spending and eased price pressures but expressed ongoing concerns about inflation risks, stating readiness to further increase the policy rate if necessary.

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European Economic Outlook and Economic Events

  • ECB Officials’ Statements on Monetary Policy

ECB Governing Council Member Villeroy announced that unless there are significant surprises, the ECB has concluded raising interest rates and could potentially consider a cut in 2024. On the other hand, ECB Member Kazimir mentioned that expecting an interest rate cut in the first quarter of 2024 is unlikely, and Member Kazaks stated that there might not be a need for an interest rate cut in the first six months of the upcoming year.


  • BoE President Bailey’s Stance on Interest Rates

Bank of England (BoE) President Bailey emphasized the need for interest rates to remain at current levels for an extended period to sustainably bring inflation back to target.


  • Eurozone Consumer Expectations

According to the Consumer Expectations Survey published by the ECB, consumers in the Eurozone kept their inflation expectations for the next year steady, while revising downward their expectations for economic growth.

The expected annual inflation rate for the next 12 months remains at 4%, while the outlook for the next 3 years is at 2.5%. Consumer expectations for economic growth for the next 12 months were revised downward from -1.2% to -1.3%.


  • Eurozone Services Sector PMI

November final Purchasing Managers’ Index (PMI) for the services sector in the Eurozone, excluding the UK, continued to indicate contraction. Notably, Germany, France, and the Eurozone experienced a slight slowdown in the contraction rate, while the UK showed a mild acceleration in service sector growth, according to the revised PMI figures.


  • Eurozone Inflation, GDP Growth and Retail Sales

For October, the Eurozone’s Producer Price Index (PPI) showed a monthly increase in line with expectations at 0.2%, maintaining an upward trend for the third consecutive month. The annual rate of decline slowed from 12.4% to 9.4%.

Final data for Eurozone GDP growth in the third quarter revealed a slight contraction of 0.1% on a quarterly basis, indicating a stagnant economy.

Retail sales in October showed a modest recovery with a 0.1% monthly increase following a three-month decline between July and September. The annual rate of decline decelerated from 2.9% to 1.2%, reflecting ongoing weakness in consumer demand due to high inflation and increased borrowing costs.


  • Inflation and Industrial Production in Germany

In the European context, last week attention was directed to the inflation data influencing the ECB’s monetary policy, particularly the final Consumer Price Index (CPI) data for November in Germany.

In Germany, the headline CPI remained flat in October with a 0% monthly change. However, in November, it exhibited a decline of 0.4%, aligning with the preliminary data, marking the sharpest decrease since December. On an annual basis, the headline inflation rate dropped from 3.8% to 3.2%, reaching its lowest level since June 2021.

Additionally, the annual core CPI in November followed the preliminary data, declining from 4.3% to 3.8%, maintaining its trajectory at the lowest levels since August 2022.


  • Production Trends in Germany

Regarding the production trends, the industrial production data for Germany in October was monitored. The industrial output in Germany experienced a 0.4% monthly decline in October, extending its downturn for the fifth consecutive month. Expectations, however, were leaning towards a slight recovery with a 0.2% increase in industrial production. On an annual basis, industrial production contracted by 3.5% in October following a 3.6% decline in September.

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Economic Indicators in Focus This Week in the European Region

  • Upcoming ECB Decisions and Economic Indicators

In the European context, Thursday will see the focus on the ECB’s interest rate decision and the speech by ECB President Lagarde. Additionally, the ECB will release its new macroeconomic projections.

Following the October meeting, where the ECB paused interest rate hikes, keeping the key refinancing rate at 4.50%, the marginal lending rate at 4.75%, and the deposit facility rate at 4.00%, President Lagarde emphasized the data-driven approach for determining the appropriate level and duration of constraints. President Lagarde, post the interest rate decision, underscored the persistence of strong inflationary pressures in the Eurozone and the expectation of high inflation for an extended period, affirming that interest rates would remain elevated for a long time.

On Tuesday, Germany’s ZEW current conditions and expectations indices for December, providing insights into the economic trajectory, will be revealed.

In November, the ZEW current conditions index showed a slight improvement, ticking up from -79.9 to -79.8 but continued its weak trend in the negative territory. On the other hand, the ZEW expectations index, influenced by an improvement in inflation expectations, rose from -1.1 to 9.8 in November, crossing into positive territory and marking the highest level since March.


  • Economic Data Releases in the Eurozone and the UK

This week will witness the release of industrial production data for October in the Eurozone and monthly GDP growth data for October in the UK on Wednesday.

On Friday, the flash PMI data for manufacturing and services sectors across the Eurozone for December will offer insights into the economic outlook.

Following the previous month’s contraction in manufacturing PMIs, associated with tightening financial conditions and weakening demand following the ECB’s interest rate hikes, it is expected that PMI data in December will exhibit similar trends. Meanwhile, service PMIs in November continued to contract in the Eurozone, excluding the UK. It is anticipated that PMI data will maintain a comparable outlook in December.


  • Central Bank Meetings

On Thursday, the meetings of the Bank of England (BoE), the Swiss National Bank, and the Norwegian Bank will be closely monitored.

The BoE is expected to keep its policy interest rate unchanged after maintaining it at 5.25% in the previous meeting, aligning with expectations and sustaining the policy rate at its highest level in the last 15 years.

The Swiss National Bank, in its September meeting, maintained the policy interest rate at 1.75%, deviating from expectations of a 25 basis point increase. The central bank is expected to keep the policy interest rate unchanged in this week’s meeting.

In its previous meeting, the Norwegian Central Bank kept the policy rate in line with expectations at 4.25%. The central bank hinted at a potential increase in the policy rate in December due to persistently high core inflation, and it is anticipated to maintain the policy interest rate in the upcoming meeting.

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Economic Indicators in Asia for the Week

  • China’s Trade Performance in November Partial Rebound After Six Consecutive Months of Decline

China experienced a partial recovery in its annual export figures in November, posting a 0.5% increase following six consecutive months of decline. However, annual imports, which had seen a 3% increase in October, displayed a partial weakening with a 0.6% decrease in November. This trend signals the fragility of domestic demand despite the comprehensive measures taken by the Chinese government to revive consumption.


  • China’s CPI Records Steepest YoY Decline Since November 2020

In November 2023, China witnessed a substantial year-on-year decline in consumer prices, plunging by 0.5%, surpassing the 0.2% drop in the previous month and defying market expectations of a 0.1% fall. This marked the most rapid descent in the Consumer Price Index (CPI) since November 2020.


  • Japan’s Economic Contraction in Q3: Surprising Downward Revision in Growth Rate

The contraction pace of the Japanese economy in the third quarter of the year saw a surprising downward revision. The quarterly contraction rate was revised from 0.5% to 0.7%, while the annual contraction rate was downwardly revised from 2.1% to 2.7%.


  • Policy Decision by the Reserve Bank of India: Maintaining Stability with a Steady Policy Rate

The Reserve Bank of India opted to keep its policy interest rate unchanged at 6.50%, marking the fifth consecutive meeting without a change in the interest rate.


  • Insights into China’s Economic Activity: November Industrial Output, Retail Sales, and Fixed Asset Investments

Friday will see the release of key economic indicators in China for November, including industrial output, retail sales, and fixed asset investments.

In November, the year-on-year growth rate of industrial output slightly increased from 4.5% to 4.6%, retail sales saw a rise from 5.5% to 7.6%, while the growth rate of fixed asset investments slightly decelerated from 3.1% to 2.9%. With the comprehensive supportive measures implemented by the Chinese government in December, a partial recovery in the year-on-year growth rates of industrial output, retail sales, and fixed asset investments is expected.


  • Central Bank of Russia’s Expected Interest Rate Hike

On Friday, attention will also turn to the decision of the Central Bank of Russia regarding its interest rates.

In its October meeting, the bank raised the policy interest rate by 200 basis points to 15%, contrary to expectations of an increase to 14%. The decision emphasized that domestic demand was increasingly surpassing production capacity, leading to inflationary pressures higher than anticipated.

It is anticipated that the bank will further increase the policy interest rate by 50 basis points to 15.50% in this week’s meeting.

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Source: EquityRT MacroAnalytics

Disclaimer: The information in the publication is not an investment recommendation and it is not an investment or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but EquityRT does not represent that it is accurate or complete. EquityRT does not accept any liability for any direct, indirect, or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author, as of the date of the publication and are subject to change without notice.

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