Weekly Market Insight - January 8th 2018

What moved the market in the past week?

The key piece of economic data last week came on Friday, January 5^th as the U.S monthly employment report showed Non-Farm Payrolls (NFP) rose 148,000 in December, cf. 252,000 in November. A figure that was revised up from the initial gain of 228,000.

The reading missed the consensus estimate for the creation of 190,000 jobs, however, the level of unemployment was steady at 4.1%

Average Hourly Earnings advanced 0.3% month-on-month in December, in line with forecasts and compared to the prior 0.1% increase which was revised down from an initial 0.2% advance. On an annualised basis, wage inflation increased 2.5% in December, as forecast.

The increase in wages is a metric that is closely monitored by the Fed for evidence of tightness in the labour market and any upward pressure on inflation that will generate. As a rule, economists consider an increase of 3.0% + to be consistent with rising inflation.

Breaking down the data one could see that the private sector created fewer of the new jobs than expected in December with a total of 146,000, compared to expectations for 185,000. November’s number was revised to an increase of 239,000, up from the prior reading of the destruction of 221,000 jobs.

Government payrolls increased by 2,000 last month, (shy of expectations of 7,000), cf. the 13,000 public jobs created in November, revised from an initial increase of 7,000 positions.

The Labour Force Participation Rate remained unchanged at 62.7% in December.

Equities

Equities posted yet more gains to reinforce a good week with the Dow moving over 25,000 and the NASDAQ trading above 7,000. Other exchanges, worldwide also booked gains.

These gains are not all because of President Trump, although his Tax Code changes have helped in recent weeks. The deeper reasons to be confident for equities is:

1. The gentle recovery in economic growth and increasing demand for companies’ products across the world economy
2. A continuing stable expansion of that other engine of the world economy, China as it addresses its internal debt problem

• This is the first time since the financial crisis that such a growth “synchronisation” has happened.

3. Little evidence of increasing inflationary pressures, meaning interest rates are not going to unexpectedly soar.

That leads to the economically benign scenario of GDP growth (leading to higher company profits) + low inflation + easy monetary policy. That is a tremendous backdrop for equities.

Forex

Despite some early post data weakness, the U.S. Dollar ended slightly higher against a basket of the other major currencies on Friday. The U.S. dollar index, was up 0.16% at 91.75 late Friday.

The EURUSD rate was lower sliding 0.31% to 1.2029; GBPUSD or “Cable” was slightly higher rising 0.18% to 1.3573 as investors awaited further new developments on Brexit.

The U.S. Dollar had fallen earlier in the week as expectations for faster monetary tightening outside the U.S., which would close the gap between the Federal Funds Rate and other central banks official interest rate levels.

Commodities

Oil prices fell on Friday after closing at fresh three-year highs on Thursday as fears over rising U.S. production undermined a rally driven by tightening supplies and geopolitical tensions.

U.S. West Texas Intermediate (WTI) crude futures for February delivery fell by 45 cents, or around 0.73%, to end at $61.56 a barrel. WTI hit a high of $62.21 on Thursday; its strongest since May 2015.

Brent crude futures, the benchmark for oil prices outside the U.S., lost 35 cents or 0.51% to settle at $67.72 a barrel by the close. Brent hit a high of $68.27 on Thursday, also the strongest level since May 2015.

The number of oil rigs operating in the U.S. fell by five to 742, according to data from energy services firm Baker Hughes.

Gold prices trickled lower in see-saw trade on Friday; investors took profits after the metal’s rally to three-and-a-half month highs earlier in the week and as the U.S. Dollar pushed higher. Gold futures for February delivery settled down 0.11% at $1,320.20 on the Comex division of the New York Mercantile Exchange.

Silver was little changed at $17.26 a Troy ounce late Friday, after earlier touching a six-week high of $17.32 and ended the week with a gain of 1.62%.

Base metals, e.g. copper ended Friday down 0.95% at $3.232 a pound and was down 2.23% for the week.

In the week ahead, gold and silver prices will stay vulnerable to any rebound in the U.S. Dollar and investors will turn their attention to U.S. inflation data.

The week ahead, what to watch on the economic calendar:

The most important data will once again come from the U.S. at the end of the week, however, there are other metrics that should not be overlooked.

All Times GMT

Tuesday 9^th 15:00: U.S. JOLT’s Job Openings (NOV) expect 6.050M previous 5.996M

Wednesday 10^th 09:30: UK Manufacturing Production (MoM NOV) expect 0.3% previous 0.1%

Thursday 11^th 12:30: ECB Account of last monetary policy meeting

Thursday 11^th 13:30: U.S. PPI (MoM Dec) expect 0.2% previous 0.4%

Friday 12^th 13:30:U.S. Core CPI (MoM Dec) expect 0.2% previous 0.1%, U.S. Core Retail Sales (MoM Dec) expect 0.4% previous 1.0% and U.S. Retail Sales (MoM Dec) expect 0.5% previous 0.8%

Have a great week.

Written by Stephen Pope, LAT Senior Lecturer.

Are you interested in learning how to trade successfully? We have a variety of courses ranging from one week to three months for all levels, to find out more click here.