Chart of the Day
Real bond yields soared in both the US and eurozone last week, which appears to have been the main factor behind the 2.1% drop in the S&P 500 and 5.1% fall in the Nasdaq. The issue for equity markets is that the move in real rates probably isn’t over, because they are still at a low level, not just relative to before Covid hit, but also relative to where they were at the start of 2021, when inflation dynamics were far more favorable. For instance, the 5-year/5-year rate in the US is still negative and over 50bp lower than in early 2021, while the eurozone equivalent is 20 bp lower than 10 months ago. The question for equity investors is whether the next leg higher will occur as rapidly as the move last week, which could cause even more pronounced stock market weakness.
Macro
The latest non-farm payrolls report showed the US labor market added a disappointingly low 199,000 jobs in December, meaning jobs were still 2.3% below the pre-Covid level. The household survey, which asks people rather than companies about whether they are working, showed a much stronger rise in employment of 650,000, potentially a sign that the NFP will eventually catch up.
Canada’s job market is roaring. Despite having a population a tenth of that in the US, employment growth in December was more than 25% of that in the US – employment is comfortably above the pre-Covid level as well.
The Fed might be more concerned about higher wage growth than weak employment growth. Base effects kept the annual rate down in December, but the 3m annualized rate rose to over 6%, much higher than before Covid (early 2020 was affected by compositional changes as lots of low-wage jobs were lost during the lockdown).
Growth in the eurozone looks weak – German industrial production unexpectedly decreased by 0.2% MoM in November, which took the YoY rate to -2.3%. The Ifo survey suggests growth will eventually improve.
With the Bank of England now hiking rates, in the UK realtors’ expectations point to slower house price growth ahead. It’s likely to be a similar story elsewhere this year.
Markets
Markets shrugged off the weak jobs number and had an eye on higher wage growth instead, with yields continuing to rise on Friday. Germany’s 10-year yield is almost positive again.
The US 10-year less 2-year curve is steeping again, but the curves beyond that have been flattening.
The euro has been tracking relative five-year rate differentials for most of the past year, but moved in the complete opposite direction on Friday, as the euro rose against the USD.
The Russell 2000 also underperformed the Nasdaq again on Friday – recent yield trends suggest this could be temporary, with the ratio of the Russell to the Nasdaq perhaps heading higher soon.
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