Friday night’s BLS was pure Goldilocks. Good jobs growth with softening wages growth. Nomura:
Incoming data show an escalating deceleration despite strong labor market data
Despite strong employment growth in NFP and ADP employment of 223k and 235k, respectively, we continue to see cracks in the labor market. Aggregate working hours, a gauge of economic activity, demonstrated another decline in December. Average hourly earnings (AHE) growth fell 0.3% m-o-m with downward revisions to the prior month. However, the ADP (NASDAQ:ADP) wage growth measure showed wage growth for job changers falling 0.5pp to 15.2% y-o-y and wage growth for job stayers falling 0.3pp to 7.3% y-o-y, suggesting inflationary pressure on the key core services ex-shelter inflation component is falling. In the household survey, the strong increase in household employment and pick-up in labor force participation suggests some strength in the labor market. However, the three-month average of concept-adjusted NFP-equivalent private employment growth remained much weaker than private employment growth from the establishment survey, fueling skepticism over NFP.
Outside of labor markets, economic data continues to rapidly soften. The December ISM services index fell into contractionary territory for the first time since May 2020, after being out of sync with consistently weak related indicators such as regional Fed business surveys and S&P service PMIs (Fig. 2). The sub-50 reading of the ISM service index supports our long-held view that a recession likely commenced in Q4. Factory orders surprised to the downside, falling 1.8% m-o-m in November in addition to being revised downward from to -0.4 from +0.4 in October, while December ISM manufacturing went deeper into contraction territory to 48.4, consistent with our view that the manufacturing sector has been in a recession for some time, along with the housing sector. On balance, we believe incoming data is consistent with the US economy entering or having already entered a recession, which combined with falling price and wage inflation, supports our call for terminal rate of 4.875% to be reached March 2023.
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Perhaps the US is already in a domestic demand recession but not if we add the external accounts which are booming. Still, an overall recession is not far away in my view. New Year seems a good time for consumers to reassess spending.
As it becomes more apparent that the world’s most important source of demand is drying up, I expect markets to shift from cheering falling inflation and an easing Fed to panicking about growth and a profits shock driven significantly by margin contraction.
As that happens, DXY should still have one more decent safe haven bounce in it, fueled especially by the premature run into EUR.
That will mean another AUD trapdoor before we move into a more consistent bull phase for currency later in the year.
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