#Articles — 10.12.2019

The US Employment Report Saves The Week

Xavier Timmermans

Fluctuations in the markets continued in line with news on the Sino-US trade negotiations and divergent economic data.

The US Employment Report Saves The Week I BNP Paribas Wealth Management

The week had started badly with new import duties and threats to Brazilian, Argentinian, French and Chinese imports. But the news was more reassuring at the end of the week. In terms of macroeconomic data, the US ISM manufacturing index and German industrial production disappointed, but at the end of the week an excellent report on US employment gave another impetus to the stock markets. Over the week, the S&P 500 and Stoxx Europe 600 both recouped their losses and returned to their respective starting points.


Hot and cold trade negotiations

At the beginning of the week, stock markets suffered the impact of new political tensions: new tariffs on steel imports from Brazil and Argentina, a threat of tariffs on $2.4 billion of French imports in retaliation for the planned taxation of technology giants operating in France and a threat to move forward with tariffs on Chinese products (not yet imposed) from 15 December if no agreement is reached by then. However, at the end of the week comments from Trump and other officials were more conciliatory.

US employment surprises positively

In November, 266,000 jobs were created in the US. This is significantly more than the 180,000 expected. Figures for the previous two months were revised up by 41,000 units. The unemployment rate fell to 3.5%. Wages rose by 3.1% year-on-year.

The pace of hirings continues to be higher than the labour force growth rate, which is closer to 100,000 - 125,000 per month.  Despite the lowest unemployment rate in 50 years, the shortage of workers does not generate excessive pressure on wages.

In Germany, on the other hand, industrial production disappointed. It was mainly investment goods that fell (-8.4% over 1 year). The decline in factory orders is a concern.  These figures offset the slight improvement in the IFO index.

OPEC +: a last-minute surprise

The OPEC countries, Russia and other alliance countries, the so-called OPEC+, have decided to restrict production by a further 500,000 barrels per day in addition to the 1.2 million barrels per day decided 3 years ago.

The initial market reaction was quite mixed as OPEC (especially thanks to Saudi Arabia) had already cut production by much more than 1.2 mb/d, giving the impression that the new target merely confirmed the current situation. But Saudi Arabia surprised everyone by announcing a further cut of 400,000 barrels from its own quota, thus bringing the total to 2.1 mb/d. The price of Brent ended the day up $1 at $64.4.

The move by Saudi Arabia is explained by an expected difficult start to the year in the oil market as global demand is slowing and US shale oil production has increased.

The situation is expected to normalise in the second half of the year. Forward prices have been too low for too long and the profitability of shale oil has been insufficient.  In the year ending 30 September, 33 small producers went bankrupt. The priority now is shareholder returns and debt repayments at the expense of investment in new drilling that should hamper US output growth.

What are we watching this week?

The markets will focus on central bank monetary policies and the elections in  Great Britain.  As expected, the Fed is likely to keep rates on hold this Wednesday. The focus will be on its growth and inflation forecasts and on ‘dot plots’ (the governors' rate forecasts). On Thursday, the ECB meeting is also unlikely to lead to big changes but all eyes will be on Christine Lagarde who chairs it for the first time. 

Thursday is also election day in Britain. A majority for the Conservative Party would allow an exit from the European Union on 31 January while the lack of clear majority could lead to more delays in Brexit or even a second referendum.