US employment remains resilient; services sector picked up in Nov
KUWAIT: Labor data came in better than expected in the US, with signs of a strong labor market across the board. Nonfarm payrolls rose by 199K in the month, higher than the 185K average estimate of economists.
The unemployment rate tightened to 3.7 percent, marking a fourth month low and below forecasts of 3.9 percent.
Average hourly earnings rose 0.4 percent from the month prior, matching the high estimates from analysts and creating a troubling sign for the Federal Reserve as they seek to cool inflation and spending. Payrolls and labor demand were expected to start slowing, but this report solidifies the strength of the jobs market and portrays consumers are in a strong position to keep spending.
Treasury yields rose sharply after the figures with the 2-year rate-sensitive yield rising to 4.74 percent - its highest level in December. In the futures market, the data deflated bets that the Federal Reserve would ease policy as soon as spring. Odds of a quarter-point cut in March fell, while a full cut is still priced in for May.
Federal Reserve officials are widely expected to keep borrowing costs on hold at the highest level in two decades when they meet this week. Chair Jerome Powell has previously pushed back against growing bets of rate cuts early next year, stressing that policymakers will move cautiously but retain the option to hike again. The solid figures will shift focus to inflation numbers as Fed officials contemplate how long to maintain interest rates at the current 5.25-5.5 percent range. A further cooling of prices would likely help push the central bank toward rate cuts if the job market avoids a more sustained re-acceleration.
Service sector activity rebounds
Amid an increase in business activity, the US services sector picked up last month, surpassing market expectations. The Institute for Supply Management said that its non-manufacturing PMI rose to 52.7 from the 5-month low of 51.8 in October. The rebound was supported by growth in fifteen industries, with transportation and warehousing demonstrating strong activity. New orders remained robust, suggesting steady demand for services, while input prices saw a minor decline offering some relief from inflationary pressures.
BoC cites progress
The Bank of Canada opted to maintain its key interest rate at the 22-year high of 5 percent last week as widely expected, marking the third consecutive meeting of no change. According to the BoC the latest data “suggest the economy is no longer in excess demand”, which implies no rate hikes are expected moving forward. The central bank noted it remains concerned about inflation risks, but refrains from mentioning that risks are increasing, instead highlighting that higher rates are restraining spending and the labor market continues to ease. Growth in Canada’s economy has stalled, and consumption remains weak.
Meanwhile, the unemployment rate rose to 5.8 percent from 5 percent in just seven months, and such loosening of the labor market typically coincides with recessions. Inflation decelerated to an annual 3.1 percent in October, and many economists do believe a soft landing is still the base-case scenario for the economy. Nevertheless, key risks facing the country’s financial system will be tested. Compared to the US, Canada’s highly indebted households carry shorter-duration mortgages that roll over more quickly, representing a major downside risk to the economy.
RBA holds cash rate steady
The Reserve Bank of Australia also opted to keep rates unchanged at its final meeting of 2023, holding the cash rate at its 12-year high of 4.35 percent. Although the hold was widely anticipated, markets displayed disappointment at the neutral tone in the post-meeting statement, sending the AUD and government bond yields lower. “Higher interest rates are working to establish a more sustainable balance between aggregate supply and demand,” Governor Michele Bullock said. “Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labor market.”
Following the meeting, swap traders trimmed their bets on another RBA hike, and are currently pricing in less than a 30 percent chance for an increase in the first half of 2024. The RBA has proven to be more careful in its hiking campaign despite core inflation remaining elevated.
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