Originally published by Rivkin Securities
US equity markets pushed to new all-time highs on Friday while the US dollar strengthened following government data that showed further signs of a tightening labour market. Month-on-month for December 156,000 new jobs were added, less than the 175,000 forecast however only 100,000 per month are required to keep up unemployment stable given growth in the population. Average hourly earnings rose +0.4% over the month taking the years gains to 2.9% from 2.5% previously reflecting scarcity of labour resources.
The unemployment rate increased slightly from 4.6% in November to 4.7% while the labour force participation rate remained stable at 62.7%. A broader measure of underemployment, the U-6 measure which includes those working part-time work for economic reasons decreased from 9.3% to 9.2%. There is still some hidden unemployment in the US, being those who have been discouraged from the workforce and therefore dropped out of the calculations. Given the improving market and wage growth these people should continue to be drawn back in over time. So there is still room for the labour market to improve further, although gains are expected to continue to slow, with the average monthly gain in 2016 at 180,000 compared with 229,000 in 2015.
Following the data release there were a number of key FOMC participants speaking at a variety of events, with noted dove Charles Evans of the Chicago Fed saying “I still think two is not an unreasonable expectation….three is not going to be implausible”. Dallas Fed President Robert Kaplan who is a voting member in 2017 suggested that the Fed will continue to remove accommodative monetary policy “gradually and patiently” noting that he would wait to assess the impact of expected policies from Donald Trump. Noted FOMC hawks Jeffrey Lacker and Loretta Mester in separate speeches suggested that rates could be raised more than three times in 2017 although there’s nothing surprising about that, given we have hawkish members making hawkish comments. Evans, Mester and Lacker are all non-voting members in 2017 but will participant in deliberations.
The US.trade deficit widened to US$45.2 billion in November from the revised lower US$42.4 billion in October, or an increase of +6.8%. Imports rose by +1.1% thanks to a stronger dollar making imports cheaper, while exports fell -0.2% with capital goods including aircraft the largest contributor. Looking at the longer-term picture the trade deficit actually decreased US$4.9 billion or -1.1%.
Both the S&P 500 and Nasdaq 100 rose +0.35% and +0.85% to reach new all-time highs shown on the first chart below. The U.S. dollar index increased +0.67% against a basket of peers, and individually gained +0.61% against the AUD, +0.69% against the EUR, +1.36% against the JPY and +1.07% against the GBP. US treasury yields also rose, both the two & ten-year yields rising +4 & +5 basis points respectively to +1.218% & +2.418%.
Oil prices gained with both Crude Oil and Brent crude rising modestly on Friday by +0.43% & +0.37% respectively despite the US Baker Hughes rig count rising by 4 to 529 as of January 6th. The rig count has now risen from the May 2016 low of 316 or 67% shown on the second chart below as higher oil prices make it once again profitable for higher cost producers to bring production back online. This will remain a key focus for prices in 2017 with the other being if OPEC & Non-OPEC members successfully monitor and implement their agreed production cuts.
Locally the S&P/ASX 200 index finished flat on Friday, up just +0.04% at 5,755.58 and we can expect a modestly stronger start to trading this morning with ASX SPI200 futures finishing +9 points higher on Friday.
Data releases:
· Australian Building Approvals (MoM & YoY Nov) 11:30am AEDT
· German Industrial Production (MoM & YoY Nov) 6:00pm AEDT
· German Trade Balance (MoM Nov) 6:00pm AEDT
· U.K. Halifax House Prices (MoM Dec) 7:30pm AEDT
· Euro-zone Unemployment (MoM Nov) 9:00pm AEDT
Chart 1 – S&P500 (Blue) & Nasdaq100 (Purple)
Chart 2 – U.S. Baker Hughes Oil Rig Count
