February 7, 2022

“US labour market is cooking on gas. Upward revisions to employment data, job openings and quits suggest the labour market could be the tightest in a century, all fuel for the fire when Federal Reserve officials meet in March to discuss another potential 50 bps hike.”

Sam Cornford, Partner – Head of Trading

Main Headlines

US President Joe Biden seized on an unexpected surge in employment last month to tout the resilience of the US recovery and reboot flagging public confidence in his handling of the economy. After official data showed that the US economy added 467,000 jobs last month despite the surge of Omicron, President Biden said that “America’s job machine is going stronger than ever” and it is fuelling a strong economic recovery. In addition to the jump in payrolls in January, there were large upward revisions to data from previous months, with the Bureau of Labour Statistics undercounting the number of jobs created by roughly 700,000 in November and December. US government bonds sold off sharply after Friday’s jobs report, pushing Treasury yields to their highest level since the start of the pandemic. The decline in the price of the debt, which moves inversely to yields, also increases pressure on the central bank to fight inflation. The biggest rises occurred in shorter-dated maturities, suggesting investors were betting that this would give the Fed more ammunition to raise interest rates.

Boris Johnson is set to make further changes to his Downing Street team this week as he seeks to ease concerns of MPs who are wavering about his future. The shake-up comes amid the fallout from the initial findings of the Sue Gray report into events at No. 10 while Covid restrictions were in place. Several Tory backbenchers have called for Mr Johnson to resign and have now submitted letters of no confidence. The PM has promised his MPs there would be a change in how No. 10 operates. On Saturday Mr Johnson announced two senior appointments to his backroom staff following a string of resignations last week. There are expected to be new staff appointments, and some ministers will share some of the existing responsibilities of Mr Barclay, who retains his Cabinet Office position. The prime minister is also thought to be looking to appoint a new chief whip, the person in charge of party discipline, and he is understood to have held discussions with senior figures to try to persuade them to take up the post. Meanwhile, Cabinet ministers appear to be squabbling over loyalty to the prime minister after chancellor Rishi Sunak and health secretary Sajid Javid distanced themselves from his Jimmy Savile smear.

GBP

Sterling is well bid against most major currencies overnight. British house prices in January rose at their slowest monthly pace since June last year as a post-lockdown boom in the housing market started to fade and a growing cost-of-living squeeze is likely to add a further brake, mortgage lender Halifax said. Senior members of Boris Johnson’s Conservative Party urged challengers to the prime minister to rein in their ambitions and focus instead on steering Britain through the biggest plunge in living standards in a generation. With people struggling with soaring energy costs and inflation, the PM should focus on tackling cost crunch instead of battling for his political career, says Iain Duncan Smith, a former Conservative Party Leader. British Foreign Secretary Liz Truss said on Sunday that Russia’s claims it has no plans to invade Ukraine were false and the UK and allies were resolved to “raise the cost” to Moscow if they took further action. Britain reported 54,095 COVID-19 cases and 75 deaths in its daily official data on Sunday, with the seven-day figure for both falling compared with the week before.

EUR

Euro is weakening against most major currencies. Brussels is examining how to shield consumers from a potential energy crisis as part of plans to protect Europe’s households, businesses, and borders from the fallout from a Russian military escalation in Ukraine. Russian President Vladimir Putin could order an attack on Ukraine within days or weeks, White House national security adviser Jake Sullivan warned on Sunday, as Washington and its European allies continued efforts to offer Putin a diplomatic way out of the crisis. A plane carrying US troops landed in Poland on Sunday, as Washington reinforces its NATO allies in Eastern Europe amid a Russian military build-up on Ukraine’s border. US President Joe Biden on Wednesday ordered nearly 3,000 extra troops to Poland and Romania, as Washington moves to reassure jittery NATO allies. Meanwhile, German industrial production dipped in December, official data showed on Monday, as supply chain bottlenecks and a drop in construction hampered Europe’s largest economy at the end of last year. The Federal Statistics Office said the country’s industrial output fell by 0.3% on the month after an upwardly revised increase of 0.3% in November.

USD

The dollar is stronger against euro and weaker against sterling this morning. The US government bond market is signalling that the Federal Reserve will be able to tame inflation in coming years without snuffing out growth in the world’s biggest economy. US officials reported that Russia has assembled at least 70% of the military firepower it intends to have in place by the middle of February to give President Vladimir Putin the option of launching a full-scale invasion of Ukraine. They have also warned that a full Russian invasion could lead to the quick capture of Kyiv and potentially result in as many as 50,000 civilians killed or wounded, according to the New York Times and Washington Post. A US official confirmed that estimate to the Associated Press, but it is not clear how US agencies determined those numbers. Meanwhile, Joe Biden seemed to suggest, on Sunday, that Russia will not choose diplomacy because they are requesting compromises that the US and NATO are not willing to make. The US has reportedly suffered 900,000 deaths from Covid-19, the highest figure of any nation. America also has the highest death rate of any wealthy country.

Markets

Stocks in Europe gained, US index futures dipped, and Treasuries stabilized as investors took stock of the outlook for monetary policy ahead of key inflation data later this week. The Stoxx Europe 600 index posted a modest gain at the open after clocking a fifth straight week of losses, the longest streak in almost two years. Retail and basic resources led the advance, with energy the only sector in the red. S&P 500 and Nasdaq 100 contracts fluctuated before turning lower. The 10-year Treasury yield was little changed and yields on most European bonds ticked higher. The dollar was little changed, while the euro snapped a six-day strengthening run. Oil’s rally paused above $92 a barrel. Investors are grappling with the prospect of the steepest monetary tightening cycle since the 1990s, with markets pricing in more than five quarter-point Federal Reserve interest-rate hikes in 2022 following a strong US jobs report. The US inflation report this week could lead to more market volatility by shaping views on Fed tightening. A reading north of 7%, the highest since the early 1980s, is expected. European Central Bank Governing Council Member Klaas Knot said he expects a rate increase as early as in the fourth quarter.

Main Economic Data/Central Banks/Government (All Times CET)

7:45 a.m.: Swiss Jan. unemployment
8:00 a.m.: Germany Dec. industrial production
8:00 a.m.: Norway Dec. industrial production
11:30 a.m.: Germany, Netherlands sells bills
12:00 p.m.: Ireland Dec. industrial production
2:50 p.m.: France sells bills
4:45 p.m.: ECB’s Lagarde speaks
Germany’s Scholz meets Biden in Washington; France’s Macron meets Putin in Moscow.

Corporate Events

Earnings include Amgen, Subaru, Hasbro, Nippon Telegraph and Telephone, Daikin, Orix, Simon Property, ON Semiconductor, Tyson Foods, Zimmer Biomet, Aurubis, James Hardie Industries

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