Markets rose last week on optimism, a globe on fire!
Jobs Data
The unemployment rate remained at 3.5% for the month of December. At the surface this may appear to be a win, however, the underlying data shows some signs of weakness. Fewer jobs were added, 145K, rather than 164K expected. There was still over 100K jobs added, not a terrible showing after the 256K added last month. There was a hope to see an increase in average hours worked, but it also declined. Lastly, wage growth slowed to 2.9%. It has averaged 3.2% for most of the year. A deceleration is concerning for the Federal Reserve’s zero rate moves in 2020.
Oil & Stocks
After attacks on US bases in Iraq Tuesday there was a general de-escalation of tensions. This buoyed stock performance, however, it caused oil to lose all the gains of the previous week. Milder tensions should mean a return to more fundamental data impacting oil prices.
Trade
On Thursday, China confirmed the scheduled trade signing of January 15th in Washington. The completion of a trade deal with China, albeit minor, could signal firmer prices for oil and materials as trade lines normalize. This could also improve prospects for collaterally damaged nations like Germany and Japan.
As much as a trade deal with China could help Germany, it could also hurt them. With the signing on the 15th, the US will have completed a trade deal with China, Canada, Mexico, and Japan. This leaves the Eurozone (EU) as the major trade partner left without a deal. Focus will likely shift applying pressure on the EU.
Eurozone Data
Outside of the risk of a trade conflict, there were reasons to be optimistic for the EU. Services PMI rose to its highest level in six months in November. This provided a good off-set to manufacturing weakness that has persisted for all of 2019. Enough so for the composite PMI to still climb in November. Additionally, inflation firmed to 1.3%; well below the 2% target but moving in the right direction.
While optimism for Germany may be improving with industrial production at 1.1%, manufacturing orders fell 1.3%. Leaving many skeptical of the short-term rebound.
Bank of England (BoE) Governor Carney stated they only have about 2.5% in rate policy left to combat a recession. A recession typically requires 5% to 6% of rate policy adjustments to cause an economic rebound. He was voicing concerns that central banks do not have ammunition to fight future recessions. It is a call to arms for fiscal policy to support monetary policy going forward.
Japan
Japan is set to increase their projections for GDP to 1% from 0.7% for 2020. They are likely to be the beneficiary of the completion of a trade deal between the US and China. They quietly got a trade deal done with the US during China’s negotiations. This helps them avoid a trade conflict with the US. They also stand to restore exports of manufacturing equipment to China as production resumes.
The adverse effects of the value added tax increase from October are still being felt in Japan. Consumer spending and wages are down sharply since the tax. What was intended to stimulate inflation, has actually cracked back spending. This will ultimately hurt inflationary pressures.
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