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Market Insights Today: Hot U.S. labor market data saw equities lower on Thursday, all eyes on today’s U.S. employment report – 6 January 2023

APAC Research

Summary:  The stronger-than-expected ADP private sector employment data and an unexpected decline in initial claims in the U.S. plus hawkish comments from Fed’s George and Bostic stirred up fear of the Fed keeping rates higher for longer. U.S. stocks fell by more than 1% and the yields on the 2-year Treasury notes rose by 10bps to 4.46%. The less hawkish remarks from Fed's Bullard and mention of 2023 being a year of disinflation late in the New York session only lifted stocks briefly. Today’s focus is on the U.S. employment report and investors will scrutinize the non-farm payrolls, unemployment rate, and average hourly earnings prints closely.

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) fell over 1% on strong job data

Investors sold U.S. equities after seeing the strong prints from the ADP employment report and unexpected declines in both initial jobless claims. Hawkish comments from Fed’s George and Bostic added to the fear of the interest rates staying higher for longer. The less hawkish remarks from Fed’s Bullard lifted the market briefly and the intra-day rally did not hold as whispers of potential upside surprises in non-farm payrolls that are scheduled to release on Friday. Nasdaq 100 fell by 1.6% and S&P 500 slid by 1.2%.  Within the 11 sectors of the S&P 500, all but energy declined. Real estate, utilities, and information technology were the biggest losers. Energy stocks gained nearly 2% as WTI crude rallied by 1.6%. On individual stocks, Walgreens Boots Alliance (WBA:xnys) fell by 6.1%, to $35.19 after the pharmacy chain said it was facing shrinking demand for Covid-19 tests and vaccines. Conagra (CAG:xnys) gained 3.4% following the guidance of higher sales and earnings.

US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) bear-flattened as yields on the 2-year jumped 10bps on strong ADP employment data

After the release of much larger job gains in the ADP employment data and declines in both initial and continuous jobless claims, Treasuries sold off across the curve initially. Adding to the fear of more rate hikes to come was the comment from Kansas Fed President George that she has raised her forecast of terminal rate to over 5% and kept it there well into 2024. Atlanta Fed President Bostic said that “there is still much work to do” to bring inflation back down to the Fed’s 2% target. A less hawkish presentation delivered by St. Louis Fed President Bullard late in the day however triggered buying in the long end of the Treasury curve while the losses in the front end stayed. Bullard said “the policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getter closer” and added that 2023 may be “a year of disinflation”. Yields on the 2-year finished the day 10bps cheaper at 4.46% and those on the 10-year fell 4bps to 3.72%. Yields on the 30-year, however, after rising as much as to 3.87%, finished the day unchanged at 3.79%.

Hong Kong’s Hang Seng (HIF3) and China’s CSI300 (03188:xhkg)

Hang Seng Index climbed 1.3% and CSI300 surged nearly 1.9% as the Caixin China PMI Services came in stronger than expectations and China announced the much anticipated gradual reopening of the border between Hong Kong and the mainland starting from January 8, 2023. Internet platform giants Alibaba (09988:xhkg) and Meituan (03690:xhkg), China restaurant chain Haidilao (06862:xhg), beer brewers China Resources Beer (00291:xhkg) and Budweiser (01876:xhkg) were among the top gainers within the Hang Seng Index. Northbound Stock Connect flows into A-shares surged to over RMB12 billion, the highest in over a month. Among stocks traded in the mainland bourses, Baijiu (Chinese white liquor) surged in anticipation of a rebound in consumption. Other top gainers in the A-share market included electric equipment, household electronic appliances, brokerage, and beauty care stocks.

FX: the dollar gained versus G10 currencies

The Dollar Index (DXY) rose 0.9% to 105.04 as the dollar gained versus all G10 currencies on strong US labor market data released on Thursday. EUR fell 0.9% to 1.0520 versus the dollar and USDJPY rose by 0.6% to 133.40. AUD retraced 1.2% against the USD to 0.6750. Benefiting from repatriation demand ahead of the Chinese New Year and equity-related inflows, CNH managed to keep its recent gains and held its ground against the dollar at 6.8890.

Crude oil rallied 1.5% on a smaller rise in EIA inventories while natural gas plunged 10% on a smaller decline in domestic supplies

The Energy Information and Administration (EIA) reported U.S. commercial crude oil inventories rose by 1.7 million barrels, well below the 4.5 million barrel increase expected. WTI crude gained 1.5% to USD73.90. On the other hand, Natural gas futures in the U.S. fell by 10% to USD3.75 after the EIA reported domestic natural gas supplies fell be less than the market expected.

What to consider?

Strong ADP Employment data and declines in jobless claims point to a resilient U.S. labor market

The ADP employment report came in much stronger than expected with a gain of 235K jobs in the U.S. private sector employment in December versus the consensus estimate of 150K. The job gain in November was also revised up to 182K from the previously reported 127K. Service sector jobs increased by 213K, led by the leisure and hospitality industry with a job gain of 123K. Being consistent with the strength of employment growth in the ADP report, initial jobless claims fell to 204K (below the 225K expected) in the week ended Dec 31, 2022, from 223K (previously reported at 225K) the prior week. Continuous claims also fell to 1694K, below the consensus estimate of 1728K and the prior week’s 1718K (previously reported at 1710K).

Street estimates of December Non-farm payrolls at +203K, unemployment rate at 3.7%, and average hourly earnings at +0.4% M/M, +5.0% Y/Y

The Bloomberg consensus estimate of December Non-farm payrolls which is scheduled to release today is a job gain of 203K, only a moderate decline from November’s 263K despite recent headlines of layoffs at large corporations and strikes. The JOLTS job openings, ADP employment, and jobless claim data released this week are consistent with solid job growth in December. The unemployment rate is expected to stay unchanged at 3.7% and average hourly earnings are expected to grow 0.4% M/M (last: 0.6%) and 5.0% Y/Y (last: 5.1%).

Fed’s Bullard delivered a presentation titled “The Prospect for Disinflation in 2023”

St. Louis Fed President James Bullard delivered a presentation “The Prospect for Disinflation in 2023” at an event organized by the CFA Society of St. Louis. Bullard’s remarks were less hawkish than his previous comments and those made by Fed presidents George and Bostic earlier on the same day. He said, “while the policy rate is not yet in a zone that may be considered sufficiently restrictive, it is getting closer”. He also added that “the front-loaded Fed policy has helped market-based measures of inflation expectations return to relatively low levels” and “these factors may combine to make 2023 a disinflationary year” as “during 2023, actual inflation will likely follow inflation expectations to a lower level as the real economy normalizes”.

Eurozone inflation, scheduled to release today, is set to temporarily fall

December inflation has dropped in the largest Eurozone countries (Spain, France, and Germany). It is expected that the eurozone CPI to decelerate as well and fall to single digits for the first time in three months. The economist consensus expects CPI to come at 9.7 % Y/Y against 10.1 % in November. This is partly attributed to a drop in energy inflation (base effects, declining oil and gas prices, and government measures in several countries to mitigate the energy bill). Based on advanced data points, we could even have a bigger drop in headline inflation than forecasted. However, this will not imply the European Central Bank will adjust its monetary stance in the short term. Inflationary pressures remain prevalent in most Eurozone countries. There are also real fears that the fall in energy inflation is only temporary.

Amazon is laying off more than 18,000 employees

The CEO of Amazon (AMZN), Andy Jassy, announced that the company is enlarging its previous plan to lay off 10,000 employees to more than 18,000 employees. The company has about 1.5 million employees. Jassy said that the company had hired too many people during the pandemic.

Caixin China PMI Services rose to 48.0 in December

December Caixin China PMI Services climbed to 48.0 from 46.7 in November, beating the consensus estimate of 46.8 but remained in the contractionary territory. Business and new orders sub-indices improved while the new export orders sub-index failed to sustain the expansion in November and fell back into contraction in December.

China reopened its border with Hong Kong

The much-anticipated announcement of the reopening of the border between mainland China and the Hong Kong SAR finally came on Thursday and will take effect from Sunday, January 8.

First Abu Dhabi Bank explored buying Standard Charted Bank

First Abu Dhabi Bank, the largest bank in the Middle East, said it had explored a potential acquisition of Standard Chartered Bank (STAN:xlon; 02888:xhkg) but it is no longer pursuing the deal.

AIA and PICC are criticized by the Chinese regulator for inaccurate capital calculation

The China Banking and Insurance Regulatory Commission criticized the onshore units of AIA (01299:xhkg) and PICC Property & Casualty (02328:xhkg) in the mainland for failing to comply with rules in the calculation of minimum and actual capital, leading to the release of inaccurate solvency data. The share price of AIA fell 2.5% and that of PICC slid 1.1% on Thursday.


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