Market snapshot: good news is bad news as key jobs data looms

Stocks fell in the US overnight, but London is eking out gains in early deals here. Our head of markets explains why.

Attempts at an early year rally on Wall Street were stopped in their tracks, as alternative labour market figures from the US indicated ongoing jobs resilience ahead of today’s non-farm payrolls report.

With the hawkish words of the Federal Reserve’s latest minutes still ringing in their ears, investors were further disappointed by an ADP employment report which showed that another 235,000 jobs were added in December. Not only was the number comfortably above estimates, but the report also stated that wages increased by more than the anticipated level. Both indicate the possibility that the labour market remains hot, with wages further adding to inflationary concerns.

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In the current environment, any good news for the economy is tending to translate into bad news for stocks, since it shows that the interest rate hiking cycle has not yet had the desired effect in dampening demand. It also adds to the probability of higher rates for longer, until such time as the rate rises rein back the economy.

Indeed, followed by a further report showing a drop in weekly jobless claims, the possibility emerged that the Fed could raise rates by 0.5% at its February meeting, as opposed to the prevailing consensus of 0.25%. The non-farm payrolls release thus takes on an additional dimension later today, where the expected addition of 200,000 jobs would compare with the 263,000 figure of the previous month. While any signs of a weakening labour market as companies become more cautious in their hiring plans would be well received, there seems little to suggest from yesterday’s numbers that another strong print can be avoided.

Asian markets largely retained their positive opening for the year, although a spike in the US dollar and bond yields washing through from the US took some of the shine away overnight.

The core case for the bulls in the region is squarely focused on China following the withdrawal of its Covid-19 zero tolerance policy. Even though some pain is being felt on the ground as another wave of infections are unleashed, there are hopes that the measures will stimulate an economic rebound which could lessen some of the slowdowns being seen elsewhere.

At the same time, and mindful of a backdrop which has seen a slump in consumer demand and the real estate sector generally, the central bank pledged to step up financial support to prompt a return to growth.

Within a shortened trading week, the UK market has also shown some early year pep. The FTSE250, bruised by a near 20% decline last year, has managed to add over 3% since Tuesday, despite the clear and obvious challenges ahead for the domestic economy.

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The FTSE100, meanwhile, has been helped along by some sterling weakness which translates into higher overseas earnings values for many of its constituent companies, and has added 2.7% so far this week.

In early exchanges, the medium-term hopes for a Chinese recovery were again in evidence, as the miners edged towards the top of the leader board, with the likes of Rolls-Royce Holdings (LSE:RR.) and Prudential (LSE:PRU) also in pursuit.