Financial Markets’ Weekly Recap, January 2-5

Wall Street’s major indices closed higher on Friday, supported by reports that although jobs increased in the United States more than expected, wage increases slowed and services activity contracted, easing concerns about the path of interest rate hikes by the Federal Reserve.

The data published by Automatic Data Processing (ADP) showed that private sector employment in the US rose by 235,000 in December. This reading came in much higher than the market expectation of 150,000.

Commenting on the data, “the labor market is strong but fragmented, with hiring varying sharply by industry and establishment size,” said Nela Richardson, chief economist, ADP. “Business segments that hired aggressively in the first half of 2022 have slowed hiring and in some cases cut jobs in the last month of the year.”

Nonfarm Payrolls in the US rose by 223,000 in December, the data published by the US Bureau of Labor Statistics revealed on Friday. This reading came in much higher than the market expectation of 200,000 and followed November’s increase of 256,000 (revised from 263,000).

The Unemployment Rate declined to 3.5% in December from 3.6% in November. The Labor Force Participation Rate improved modestly to 62.3% from 62.1% and the annual wage inflation, as measured by the Average Hourly Earnings, declined to 4.6% from 4.8%, compared to market expectation of 5%.

The data published by Statistics Canada revealed that the Unemployment Rate declined to 5% in December from 5.1% in November . This reading came in better than the market expectation of 5.2%.

Further details of the publication showed that the Net Change in Employment was +104K, much higher than analysts’ estimate of +8K.

The economic activity in the US service sector contracted in December with the ISM Services PMI dropping to 49.6 from 56.5 in November. This reading came in much worse than the market expectation of 55.

Oil

Oil prices were unchanged on Friday amid a decline in the US dollar and US jobs reports, but the two benchmarks ended the first week of the year in decline due to global recession fears.

Brent crude futures fell 12 cents, or 0.2 percent, to settle at $78.57 a barrel, and US West Texas Intermediate crude rose ten cents, or 0.1 percent, to reach $73.77 a barrel.

On a weekly basis, both Brent and West Texas Intermediate fell by more than eight percent, which is their largest weekly decline in the beginning of the year since 2016.

Both benchmarks rose about 13 percent over the previous three weeks.

Europe

European stocks closed at a seven-month high on Friday, supported by mining and oil stocks, while data indicating moderate job growth in the United States eased concerns about the Federal Reserve’s path to raising interest rates.

The pan-European Stoxx 600 index closed 1.2 percent higher, at its highest level since May. And achieved a weekly gain of 4.6 percent, to record the best weekly performance in more than nine months.

Shares of the basic resources sector jumped 2.5 percent to lead the sector’s indices, and shares of mining companies with exposure to China rose amid higher copper prices. Energy stocks rose 1.8 percent, supported by the rise in oil prices.

Influencing factors were absent during the early trading hours before stocks gained momentum after data from the United States showed that non-farm payrolls rose by 223 thousand jobs in December, less than the previous month’s data, while average wages increased 0.3 percent and came less than it was. Expected and also below the rate of increase in the previous month.

Economic data from Europe also boosted sentiment, as retail sales rose in Germany in November, adding to other positive data this week that suggested the recession would be less than expected and that price pressures in some countries were easing.

Inflation in the European single currency area declined last month by more than expected, but underlying price pressures rose, which means that the European Central Bank is likely to continue raising interest rates in the coming months.

Data published by the European Union’s statistics office Eurostat on Friday showed that consumer price growth in the region, which expanded to 20 with Croatia’s accession on January 1, slowed to 9.2 percent in December from 10.1 percent in the previous month. The rate came in below expectations of a 9.7 percent rise in a Reuters poll.

However, this seemingly good data hides the not-so-good details as the bulk of the decline came as a result of lower energy prices while all major components of core inflation increased.

The inflation rate, which excludes volatile food and energy prices, rose to 6.9 percent from 6.6 percent, while a more restrictive measure that also excludes alcohol and tobacco prices rose to 5.2 percent from 5 percent.

Inflation accelerated in services and non-energy industrial goods, which are closely watched by the European Central Bank to gauge continued price growth, adding to fears that dealing with higher prices will be more difficult than expected.

USD

The dollar gave up early gains after US jobs data showed that employers added 223,000 jobs in December, more than experts expected, while wages grew slightly less than expected.

Economists had expected an addition of 200,000 jobs. Wages increased 0.3% last month, compared to 0.4% in November, and less than expectations for a further 0.4% rise. This led to a decrease in the increase in wages on an annual basis, to 4.6 percent, compared to 4.8 percent in November.

In the end, the dollar changed little in today’s trading against a basket of currencies, to record 105.11, after earlier hitting 105.63, the highest level since December 7.

There were no significant changes in the euro on Friday as well, to record 1.0524 dollars, and the dollar rose 0.20 percent against the Japanese yen to 133.64.

The Federal Reserve raised interest rates by 50 basis points at its meeting in December, after four consecutive increases of 75 basis points.

Federal Reserve fund futures traders increased their bets that the US central bank will raise interest rates by 25 basis points at the end of its two-day meeting on February 1, after the data came out on Friday.

Consumer price data due to be published on January 12 may affect the Fed’s policy.

The data is expected to show that headline inflation was unchanged in December, while core inflation rose 0.3 percent.