As if things weren't interesting enough, our head of markets looks ahead to today's US jobs report and possible outcomes. He also discusses some of the big stock market movers this side of the pond.
Investors remain apprehensive following the Federal Reserve’s move to a more hawkish stance, with the US jobs report later providing further colour to the economic backdrop.
The much stronger than expected ADP employment data could be echoed in the non-farm payrolls (NFP) number today, where the consensus is for around 400,000 jobs to have been added in December, and for the unemployment rate to reduce slightly to 4.1%. November’s figure of 210,000 was significantly lower than expected, and a bounce back is expected.
The number also goes to the heart of the Fed’s dual mandate in controlling employment and inflation. A strong NFP number could play into the Fed’s hands in that maximum employment is close to being reached, allowing full attention to be turned to the question of persistently high inflation. That would give the green light for earlier than expected interest rate rises.
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At the same time, the reading could buy the Fed some time since the full effects of the Omicron variant will not be reflected. Alongside a growing feeling that there are swathes of people leaving the workforce, such as those in front-line positions not wishing to be exposed to the new variant, it remains to be seen whether this trend will become entrenched. If it does, it would further underline the argument that full employment has indeed been achieved. It would also likely add to wage inflation as it is believed that the supply of jobs is currently outstripping demand, which would strengthen the Fed’s determination to tackle inflation.
Such considerations have provided a difficult environment for markets where, after a positive start, each of the three main US indices are currently down for the week. The Nasdaq has taken the brunt of the selling pressure and stands down by over 3.5% after the first four days of trading in 2022.
With many of the larger tech companies trading at extremely high valuations given future growth prospects, these stocks are particularly sensitive to a rising interest rate environment. At the same time, interest rates should settle at a relatively low level by historical standards, which in turn could provide some future relief to the sector.
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The overarching economic concerns in the US have not fully washed through to the UK, where the FTSE100 is currently ahead by 1% in the year to date.
The index has been supported by a number of sector specifics, such as a buoyant oil price which has lifted the majors like Shell (LSE:RDSB) and BP (LSE:BP.) by over 6%. In addition, hopes for a return to unrestricted international travel and increasing signs of returning holiday demand have boosted the likes of International Consolidated Airlines (LSE:IAG), which is ahead by 14% in the first few days of trading.
In addition, the generally tightening monetary environment has provided a new year fillip to the banks, where Lloyds Banking Group (LSE:LLOY) for example has already added over 10%.
The fourth-quarter and full-year numbers will be eagerly anticipated, not only in terms of an increasingly welcoming environment for the banks, but also the likelihood of improving shareholder returns given the current levels of excess capital which the banks have accumulated.
Some early indications may be gleaned in a read across from the US banks, who begin their reporting at the end of next week. Lloyds is scheduled to publish annual results on 24 February.
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