Lots of news to digest this week, and the market remains volatile as we wait to be updated on the potential impact of the latest Covid variant.

 

In an outcome that nobody seemed to be expecting, the Canadian economy saw a massive re-acceleration in hiring during November. The labour market added 154K jobs, in sharp contrast to the consensus projection for a gain of only 38K, and pushed the unemployment rate all the way down to 6.0%. Hours worked were up a similarly strong 0.7% during the month, taking that measure back up to its pre-pandemic level. It should be noted that Statistics Canada said that the flooding in BC occurred after most survey collection was complete, so any effects from that event will show up in the next report. The jobs gain suggests that, even if GDP isn’t near its prior trend, labour markets are tightening sharply, and that positions the Bank of Canada to hike earlier than we had expected, although the impact of omicron is of course still creating a significant degree of uncertainty to any such forecasts.

 

The US labor market provided a downside surprise in November, as only 210K jobs were created, well below the consensus expectation of 550K. The weakness was widespread, as the recovery in the leisure and hospitality sector almost stalled, while employment in retail trade declined. The household survey showed an outsized gain of 1.14mn jobs, however, which resulted in the unemployment rate falling by more than expected, to 4.2% from 4.6%, even against a slight rise in the participation rate. Wage gains were slightly weaker than expected at 0.3%, but aggregate hours worked accelerated to 0.5%. Given the scale of job openings in the US, the weak headline could reflect a lack of available workers, but there is ample uncertainty about the next few months should Omicron become the dominant variant in the US, impacting demand for services and labor force participation.

 

Any fears of an imminent government shutdown have been averted by the US Senate voting 69-28 to clear the stopgap government spending bill, funding the govt through February 18. The bill now only requires President Biden’s signature. Ahead of the NFP release, Atlanta Fed President Bostic, also a 2021 but not 2022 voter, underlined that "The data, as it has come in over the last several months, suggests….., it may be appropriate for us to pull forward a lift-off". Moreover, he added that "I think having this (tapering) finish some time towards the end of the first quarter would be in our interest". We have long viewed the Fed as being keen to delineate tapering from tightening. It seems that Bostic’s view of bringing forward the timing of the full unwind in bond purchases is largely consistent with rate expectations priced in by the market. The more hawkish pivot from the Fed Chair is predicated upon the Fed moving away from the transitory inflation narrative and moving towards fighting back against what the Fed Chair characterizes as ‘persistently higher inflation. The Fed may argue the bar for tightening is higher than that for tapering. However, a continuation of improving employment dynamics, we expect the economy to reach full employment by mid-2022, remains part of the policy mix. If we are correct to assume another robust employment report, we are likely to see the rates strip return towards pricing in three hikes next year, unwinding the recent Omicron-related correction in US rate expectations.

 

European markets edged higher as investors watch omicron news and economic data. Eurozone consumer price inflation in November hit a record high of 4.9% annually in November, while producer prices surged 5.4% in October for a 21.9% year-on-year climb. The European Central Bank has committed to continue to purchase bonds until the pandemic has ended, clearly, Omicron risks extending the duration of that commitment. It is against the backdrop that we are less than surprised that ECB President Lagarde has once again reiterated the message that it’s very unlikely that the ECB will raise rates next year. That hawks such as the Dutch central bank Governor Klaas Knot have been left to suggest that he would not rule out a rate hike in 2023 underlines that the doves are very much in policy control. We would note that Knot continues to maintain the line that the current inflation spike is temporary. The difference between the US and UK and the eurozone is the lack of presence of second-round wage effects. While hawks like Knot have bought into the inflation is transitory narrative, we await the publication of the ECB staff forecasts on 16 December to determine the bank's medium-run inflation profile. We would expect the bank to discount inflation remaining well below the 2% target into 2024. Ahead of the December ECB the tightening of Covid restrictions across the continent, even before the arrival Omicron variant, has started a debate as regards the potential perpetuation of the PEPP program beyond its current March expiry date. Estonian central bank hawk Madis Muller has stated that “I do not think that the new strain of virus is a sufficient reason to revise the timetable for closing PEPP net purchases”. That the hawk felt it necessary to make the statement will fuel the narrative regarding a potential PEPP extension.

 

Over in Britain, UK steel and aluminium producers are still being disadvantaged versus European competitors due to the refusal of the US to remove Trump-era tariffs. The Financial Times is now reporting that UK ministers have rejected Washington’s linking of the lifting of metal tariffs with a dispute over post-Brexit trading rules in Northern Ireland. A UK government minister stood up in Parliament yesterday to the two issues were entirely separate and to describe them otherwise was a ‘false narrative’. While that may be the interpretation of the Johnson government, it would appear that progress on either removing the tariffs or progressing with a US-US trade deal is likely to remain off the table for the foreseeable future. In other news, final services PMI proved to be revised down by just a tick to 58.5. New business growth registered a five-month high, despite surging price inflation. The strong rebound in underlying service activity should keep the many Bank of England members predisposed for action should labour market data remain supportive. However, early anecdotal evidence suggests Omicron is impacting activity into the key festive spending season. Moreover, the sector had gained from the loosening in travel restrictions which had witnessed the fastest pace of new business from abroad since March 2017, Omicron suggests that trend may not extend. In terms of the policy outlook, we will be listening to Monday’s speech from BoE swing voter Ben Broadbent on ‘the outlook for growth and monetary policy with interest.

 

Asian markets closed mostly higher though Hong Kong was weighed down by tech stocks. Ride-hailing giant Didi Global said it will delist from the New York stock exchange and pursue a listing in Hong Kong, succumbing to pressure from Chinese regulators concerned about data security. China's services sector expanded at a slower pace in November with rising inflationary pressures and Covid outbreaks.

 

Finally, oil prices advanced after OPEC proceeded with an output hike but left room for quick adjustments due to an uncertain outlook. Going into the OPEC+ meeting there were suspicions the group was initially minded to row back from increasing the production ceiling by 400k b/d. It had appeared the group was rather dismayed by the release of global strategic petroleum reserves. However, it appears lobbying by the White House may have encouraged Saudi Arabia to row back from action. US lobbying, including a high-level delegation going to Saudi, has witnessed a US attempt to re-frame the US-Saudi relationship. For the US the desire to halt the rise in gas prices, in an attempt to enhance weak Democratic approval ratings, appears clear. OPEC+ has retained the option to their revise their production plans as necessary, so we can expect action should demand dynamics prove to change due to Omicron assumptions.

 

As always, give us a shout if you have any questions, or if you’d like to book a portfolio review.

 

Stay safe,

 

Mike