Economy

December’s jobs report showed employers added 216,000 jobs for the month while the unemployment rate held at 3.7%. That compared with respective estimates of 170,000 and 3.8%.
The hiring boost came from a gain of 52,000 in government jobs and another 38,000 in health care-related fields such as ambulatory health-care services and hospitals.
Average hourly earnings rose 0.4% on the month and were up 4.1% from a year ago, both higher than the respective estimates for 0.3% and 3.9%.

The U.S. labor market closed out 2023 in strong shape as the pace of hiring was even more powerful than expected, the Labor Department reported Friday.
December’s jobs report showed employers added 216,000 positions for the month while the unemployment rate held at 3.7%. Payroll growth showed a sizeable gain from November’s downwardly revised 173,000. October also was revised lower, to 105,000 from 150,000, indicating a slightly less robust picture for growth in the fourth quarter.

Economists surveyed by Dow Jones had been looking for payrolls to increase 170,000 and the unemployment rate to nudge higher to 3.8%.
A more encompassing unemployment measure that includes discouraged workers and those holding part-time jobs for economic reasons edged higher to 7.1%. That increase in the “real” unemployment rate came as the household survey, used to calculate the unemployment rate, showed a decline in job holders of 683,000 as the ranks of those working multiple jobs increased by 222,000.
The labor force participation rate, or the share of the civilian working-age population either employed or looking for a job, slid to 62.5%, down 0.3 percentage point to its lowest since February and down 676,000 on a monthly basis.
The report, along with revisions to previous months’ counts, brought 2023 job gains to 2.7 million, or a monthly average of 225,000, down from 4.8 million, or 399,000 a month, in 2022.

Major averages meandered through the day as markets reacted to a lower than expected reading from the ISM services gauge. The measure posted a lower than expected 50.6 reading, reflecting only narrow expansion, and the lowest level of the employment component since May 2020.

Treasury yields were mostly higher, particularly in longer duration.
The December hiring boost as reflected in the Labor Department report came from a gain of 52,000 in government jobs and another 38,000 in health care-related fields such as ambulatory health-care services and hospitals. Leisure and hospitality contributed 40,000 to the total, while social assistance increased by 21,000 and construction added 17,000. Retail trade grew by 17,000 as the industry has been mostly flat since early 2022, the Labor Department said.
On the downside, transportation and warehousing saw a loss of 23,000.
The report showed that inflationary pressures, despite receding elsewhere, are still prevalent in the labor market. Average hourly earnings rose 0.4% on the month and were up 4.1% from a year ago, both higher than the respective estimates for 0.3% and 3.9%. The average workweek edged lower to 34.3 hours.

Fed funds futures markets also reacted, lowering the odds of a March rate cut from the Federal Reserve to about 56%, according to the CME Group.
“Today’s report speaks to the bumpy road ahead for the Fed’s journey back to 2% inflation,” said Andrew Patterson, senior international economist at Vanguard. “The decision of when to first cut policy rates remains one for the second half of the year in our view.”
Friday’s data adds to the case that the U.S. economy continues to defy expectations for a slowdown, despite an inflation-fighting campaign from the Fed that has produced 11 interest rate hikes since March 2022 totaling 5.25 percentage points, the most aggressive monetary policy tightening in 40 years.
At their December meeting, Fed officials released projections that indicate they could enact three quarter-percentage point interest rate cuts this year. Markets, though, expect the central bank to be more aggressive, with futures traders pricing in up to six cuts.

The belief that the Fed can start cutting is fueled by the view that inflation will continue to recede after peaking at a 41-year high in mid-2022. Inflation is still above the Fed’s 2% target but has been making steady progress lower since the increases began.
However, Friday’s report could challenge the market narrative of a substantially easier Fed.
“Jobs growth remains as resilient as ever, validating growing skepticism that the economy will be ready for policy rate cuts as early as March,” said Seema Shah, chief global strategist at Principal Asset Management. “Indeed, the recent run of labor market data generally points in one direction: strength.”
Economic growth has held solid after consecutive negative-growth quarters to start 2022. Gross domestic product is on track to increase at a 2.5% annualized pace in the fourth quarter, according to the Atlanta Fed’s GDPNow real-time tracker of economic data.
Consumers have been resilient as well. Holiday spending likely hit a record this year, rising 5% to $222.1 billion, according to projections by Adobe Analytics.
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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.It is, on the face of it, a paradox. Markets in October were mired in pessimism as inflation remained stubbornly high and investors feared that central banks would keep policy interest rates higher for longer. By December, those same markets were gripped by euphoria thanks to seemingly dovish statements on interest rates by Federal Reserve chair Jay Powell that appeared to promise earlier rate cuts than previously expected. And now in January, equity markets have made a rocky start to the year.The key to understanding these extreme swings in sentiment is to be found in the mechanics of data dependent monetary policy. This causes investors to revise and re-revise endlessly their trading strategies based on intense parsing of central banking rhetoric and on expectations of how ageing incoming data of variable quality will influence central bankers’ rate setting.Within this backward-looking, shaky policy framework, short-termism is endemic. And the risk is that markets overlook longer term fundamentals. That risk will be especially high in 2024, which will witness continuing reversals in longstanding economic trends.Despite the markets’ cheery recent assumption about waning inflation, the protracted era of ultra-low interest rates is surely over. Yes, short-term rates will fall in 2024 as inflation continues to decline. But the longer term is another matter.For a start the central banks’ commitment to shrink their balance sheets after the extended period of quantitative easing means that they will be withdrawing their buying power from public markets just as government borrowing requirements are running at peak levels.A broader threat to the Panglossian “free lunch” view of government debt born of negligible real interest rates since the 2007-09 financial crisis relates to the reversal of several positive supply shocks to the world economy since the 1980s. The most important concerns the impact of the rise of China and other emerging markets on the global labour market. This led to a glut of labour that depressed wages in the developed world. One result was reduced investment as companies substituted labour for capital, which helps explain the dismal productivity record since the crisis. Another was quiescent inflation (for which central bankers breezily took credit).Yet now the global labour force is shrinking. Since the pandemic labour’s bargaining power has increased and will increase further as workforces go on shrinking in ageing advanced countries and also in China and Korea. The surge in wages now encourages companies to substitute capital for more costly labour.Other economically benign effects of globalisation such as cross-border supply chains are being de-risked in the face of geopolitical confrontation. This brings resilience at the cost of economic efficiency. Meantime, protectionism is on the rise. All of which is dismal news for growth.Harvard’s Kenneth Rogoff argues that even if inflation declines it will probably remain higher for the next decade than in the decade after the financial crisis. He cites factors including soaring debt levels, increased defence spending, the green transition and populist demands for income redistribution. Hard to argue with that, although there is an open question as to how far technologies such as artificial intelligence might offset these inflationary pressures.Do not expect China to come to the rescue on either the growth or inflation front as it did after the financial crisis. Its former growth model, substantially driven by the property market, is structurally challenged now and China is expected henceforth to import less. One of the most profound impacts from the reversal of ultra loose monetary policy turns on the profitability and finances of the corporate sector in the advanced countries. A study by the Fed’s Michael Smolyansky shows lower interest expenses and corporate tax rates explain more than 40 per cent of the real growth in corporate profits from 1989 to 2019 for S&P 500 non-financial firms.That is an eye-catchingly large number and the picture will be similar across the developed world. In today’s fiscal bind, the scope for more corporate tax cuts is minimal and interest rates are not going back to near-zero. So prepare for a long-run slowdown in corporate profits growth and stock returns.After these great reversals the new normal for investors will include a very challenging monetary landscape with heightened volatility and higher long bond yields than in recent years. Against a background of burgeoning public debt, stringent official interest rates now contribute to uncomfortably high government borrowing costs.Political pressure on central banks may thus intensify. Meantime higher rates and bond yields in the no longer ultra-loose monetary regime will impose continuing strains on the financial system, putting the central banks’ goals of inflation control and financial stability potentially in conflict. It seems questionable whether market practitioners have taken all this toxic matter on [email protected] More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK banks were lambasted last year for failing to pass on interest rate rises to savers. Now that the Bank of England rate cycle appears to have peaked they seem to be making amends by engaging in a mortgage rate price battle. In theory, such largesse means profit margins will be squeezed. But lower funding costs could make up the difference. This week, both HSBC and Lloyds Bank-owned Halifax cut remortgage rates by as much as one percentage point. Average two- and five-year UK mortgage rates exceed 5 per cent but competitive new products are being priced at 4 per cent or below. Mortgage rates are being reduced in line with falling UK bond yields, swap rates and the expectation of policy rates cuts by the end of this year. For banks, intense mortgage competition can be expensive. Tightening mortgage spreads contributed to disappointing net interest margins at NatWest and Barclays last year. Typical spreads of 50 to 60 basis points at the end of last year barely covered costs.The UK housing market has weathered the rate hiking storm far better than some forecasts expected. Still, activity slowed, prices dipped and approvals for new mortgages fell by about a quarter last year. Volumes are now expected to rise. About 1.5mn fixed-rate mortgage deals are set to expire this year. Greater competition in the mortgage market will be helpful to borrowers. Arrears and possessions are already at historically low levels. This benign situation is expected to continue. But even for banks, lower mortgage rates do not necessarily mean profit pain. Two and five swap rates used to price mortgages have fallen sharply in recent months and are down almost 150 basis points since the summer. Eye-catching reductions in mortgage rate repricings are not as generous. Falling rates will not automatically put extra pressure on NIMs. Lex is the FT’s flagship daily investment column. If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline More

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The U.S. labor market beat expectations again in December, adding 216,000 jobs to close out the year while the unemployment rate held steady at 3.7%.
Yet the job gains were slower than the same period a year ago, with the three-month average gain dropping to 165,000 a month compared with an average of 284,000 in December 2022, according to Nick Bunker, director of economic research for North America at the Indeed Hiring Lab.

“After entering 2023 with a sonic boom, the US job market is headed into 2024 at a comfortable cruising speed,” Bunker said. “The pace of job creation is strong but not overwhelming, unemployment is low and stable, and job openings are plentiful.”

Bunker noted that just a few sectors – education and health services, government, and leisure and hospitality – accounted for more than 75% of the job growth in December. He cautioned that “turbulence lurks on the edges of the radar” with labor force participation dropping toward year-end while wage growth accelerated.
“While labor demand may still be high, labor supply may be struggling to keep pace,” Bunker said. Nevertheless, the report should alleviate short-term recession fears, he said.
“If there’s any surprise emerging in this report, it’s that the labor market might have more momentum than previously thought,” he said.
The public sector led the way last month with 52,000 jobs, overwhelmingly in local government, according to the Bureau of Labor Statistics.

Health care also saw solid growth with nearly 38,000 jobs added, primarily in ambulatory care and hospitals. Job growth was strong in the sector throughout 2023, adding 55,000 positions a month on average compared with monthly gains of 46,000 in 2022.
Social assistance positions rose by 21,000 in December, with jobs gains averaging 22,000 per month in 2023, slightly more than the 19,000 average monthly increase in 2022.
The leisure and hospitality industry was little changed in December, adding 40,000 positions, with employment in the sector remaining below its pre-pandemic level by 1%, according to the Bureau of Labor Statistics.
The retail sector added 17,000 jobs to end the year, also little changed, with gains offset by a loss of 13,000 positions in department stores. Employment in the industry has struggled to gain speed since recovering from pandemic losses in 2022, according to the data.
Construction also trended upward with 17,000 new positions in December. The sector saw monthly gains of 16,000 in 2023 on average, compared with 22,000 in 2022.
Employment was little changed last month in mining, oil and gas, manufacturing, wholesale trade, information, financial activities, and other services, according to the Bureau of Labor Statistics.
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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Shipping giant AP Møller-Maersk will reroute ships from the Red Sea around Africa “for the foreseeable future”, after Houthi militants in Yemen escalated their attacks in the region.The move by Maersk came as container shipping rates shot higher this week and economists warned that the global economy would come under fresh inflationary pressure if the disruption continued. “The situation is constantly evolving and remains highly volatile, and all available intelligence at hand confirms that the security risk continues to be at a significantly elevated level,” said Maersk in a statement. “We have therefore decided that all Maersk vessels due to transit the Red Sea/Gulf of Aden will be diverted south around the Cape of Good Hope for the foreseeable future.”The world’s largest shippers have been abandoning the Suez Canal route connecting Asia and Europe despite US-led efforts to bolster maritime security in the region, following a swath of attacks by the Iranian-backed militants. The Houthis have launched at least 20 attacks on ships off Yemen’s coast in recent weeks and have vowed to continue targeting vessels in response to Israel’s war in Gaza. Maersk’s announcement illustrates how shippers are now preparing for a prolonged disruption. The longer distances container vessels are sailing around Africa have tightened the availability of ships and led to rates more than doubling since mid-December on the key Shanghai to Rotterdam route, rising to $3,100 per standard 40-foot container from $1,400, according to Xeneta.“This confirms that there are no quick solutions to this crisis,” said Peter Sand, chief analyst at Xeneta, a container market intelligence company. “Maersk and other shipping companies will now be thinking in months and quarters rather than days and weeks.”Economists warned that if the problems persisted it would slow the pace at which global price pressures subside and could delay the timing of expected interest rate cuts by central banks.Investors expect the US Federal Reserve and European Central Bank to start cutting borrowing costs as early as March in response to a rapid cooling of price pressures. But markets have scaled back these bets in the past week after a rise in eurozone inflation and signals that Fed officials want to keep borrowing costs high for longer.Ben May, director of global macro research at consultants Oxford Economics, said that based on IMF research the recent rise in shipping costs could add about 0.6 percentage points to global inflation if it was sustained for the rest of this year.This would slow the speed of disinflation and “could be another reason to believe that market expectations for the extent of policy loosening by the Fed this year have gone too far”, he said.Thomas McGarrity, head of equities at RBC Wealth Management, said: “If the Red Sea disruption persists, the knock-on impact will likely be felt by industries such as clothing retail, with negative implications for margins due to higher freight costs.”Western powers have deployed a number of naval vessels to the region to help provide protection for commercial shipping. But they have so far avoided a more robust response, such as targeting Houthi military facilities in Yemen, for fear of expanding the conflict. Shipping companies are widely seen as beneficiaries from the Red Sea problems as freight rates increase and investors bet that what is bad news for the global economy and retailers could bring better profits for the biggest container groups.Shares in Denmark’s Maersk are up almost 40 per cent since December 12 while those in German rival Hapag-Lloyd have increased two-thirds in the same period.A Maersk container ship on the Suez Canal in December. Shippers are now largely avoiding this route despite US-led efforts to bolster security More

LONDON (Reuters) – A 150 billion euro ($165 billion) deluge of government bond sales in January is fueling unease in euro area bond markets, a foretaste of a potentially record amount of public debt that markets will have to absorb this year. Bond yields, which move inversely to prices, have started 2024 higher after plunging in November and December. Germany’s 10-year yield, the euro zone benchmark, has risen to just over 2% from a one-year low of 1.896% last week.A trimming of investor bets on how much and how early central banks will cut interest rates this year has driven the bond selloff. Now adding to it, are concerns that markets will struggle to digest another year of hefty government debt sales.ING estimates that the euro area will issue around 150 billion euros of debt this month alone as governments seek to take advantage of the recent yield fall and investors look for new-year opportunities. There is 72 billion euros of net supply when redemptions are factored in.Inflation has driven euro zone states to increase welfare payments and public sector wages, while higher borrowing costs are adding to their interest bills, keeping debt issuance high.A similar amount of debt was issued in January last year, but it’s now coming after a powerful rally that looks like it’s nearing an end, said Societe Generale (OTC:SCGLY) interest rates strategist Jorge Garayo.”The current (yield) levels, they look difficult for the market to digest the amount of supply that is going to be coming,” he said. “For us, supply will be a worry and should have an upward impact on yields.”Michael Weidner, co-head of global fixed income at Lazard (NYSE:LAZ) Asset Management, said one concern is that governments plan to issue a large amount of longer-dated debt. Longer-dated bonds are generally viewed as more risky, so investors typically demand a premium to hold them.”We believe there will be more issuance in (longer-dated bonds), and how much duration the market’s ready to absorb is a bit of a question mark given the level of yields,” said Weidner. Germany plans to issue 10-year bonds this month, and Spain has already sold a 30-year maturity. ECB FACTOR Adding to investors’ worries is the fact that the European Central Bank (ECB), a hoover of government debt over the last decade, is extricating itself from the market.The ECB announced in December it would start to reduce its 1.7 trillion euro pandemic-era bond purchase programme – PEPP – by 7.5 billion euros a month in the second half 2024. It is already winding down another of its asset purchase schemes.When so-called quantitative tightening is taken into account, markets could have to absorb a record 675 billion euros of government debt this year, Barclays estimates, up 25 billion euros on last year.Weidner said he expects the gap between Italian and German bond yields to widen as Germany tries to bear down on its debt levels and the ECB, which has been a crutch for Italian bonds, steps out of the market.At around 168 basis points, that spread has widened roughly 10 bps over the past week but was still below peaks seen in recent years. Not everyone is concerned. Joost van Leenders, senior investment strategist at Van Lanschot Kempen, said inflation and central banks will continue to drive bond markets.”The economic and inflation cycles tend to be far more important than concerns about bond issuance,” he said. “Bond yields have fallen because inflation has fallen.”Governments will still be able to issue debt, said RBC Capital Markets’ chief European macro strategist Peter Schaffrik, especially as they also plan to redeem plenty of bonds, returning money to investors.”I don’t think there will be any failed auctions or anything like that, it’s just a question of the yield concession that the market demands.”($1 = 0.9122 euros) More

BUENOS AIRES (Reuters) – The rally in Mexico’s peso will probably lose some steam this year as an expected shift in central bank policy to a less restrictive approach could erode the currency’s attractive rate spread, a Reuters poll showed.In 2023, the peso had its strongest performance against the dollar in more than three decades, as the central bank – known as Banxico – drove inflows by leaving its key rate at a multi-year high of 11.25% for much of the year to lower inflation.But now the peso is seen trading at 18 per dollar at year-end, potentially losing 5.4% from around 17 on Wednesday, according to the median estimate of 25 currency strategists polled Jan. 2-4.The expected drop is bigger than a consensus inflation forecast of 4.0% – meaning the currency will undergo some pressure from narrower rate differentials ahead, apart from the usual adjustment to rising consumer prices.”Central banks will begin to ease in 2024 and we anticipate rate spreads between Mexico and the United States will decrease by 100-150 basis points,” said Montserrat Aldave, principal economist in Finamex.At 11.25%, Banxico’s rate continues to offer a big margin over the U.S. Federal Reserve’s range of 5.25%-5.50% for the cost of credit, which investors capitalize on in profitable so-called “carry trade” bets.Mexico’s central bank could weigh a rate cut in the first quarter of 2024, the bank’s governor said last month. Annual inflation stood at 4.32% in November, well below a 20-year record of 8.70% in August 2022.Meanwhile, the monetary outlook in the U.S. is less clear, even after the Fed’s latest minutes showed a growing sense among policymakers inflation is under control and concerns about downside risks for the economy from restrictive policy.Foreign exchange strategists are also on the lookout for events surrounding Mexico’s June 2 presidential election. Ruling party candidate Claudia Sheinbaum has a big lead over her main rival.”We do not expect any significant impact on the peso, since on previous (election) episodes volatility only increased one month before (the vote) and then dissipated afterwards,” Finamex’s Aldave said.Last year the peso gained 15%, surpassing the Brazilian real’s 9% advance. The real is set to end 2024 0.6% weaker at 4.95 per dollar, but still moving close to the 5.0 mark for a third consecutive year. (Reporting and polling by Gabriel Burin in Buenos Aires; Additional polling by Indradip Ghosh, Mumal Rathore and Susobhan Sarkar in Bengaluru; Editing by Andrew Cawthorne) More