US Employment Showing Healthy Gains

Week Ending 08 December, 2023

The US November employment figure was a key release and showed a healthy gain of +199,000 (Oct: +150,000). There were good gains across sectors: Healthcare added +77,000, government added +49,000, manufacturing added +28,000 and leisure/hospitality added +40,000. Average hourly earnings rose +0.4% m/m to 4.0% y/y. The monthly rise was ahead of expectations, but the annual rise was in line. It could well be the wage growth portion of the labour market proves to be a key support for a soft landing. Rising pay and more people returning to the labour force are helping growth without fanning inflation excessively. In addition to another moderation in the Job Openings data, we have also seen a rise in productivity (output per worker). The ideal scenario is a strong but moderating labour market – this release more-or-less conforms to this and points to a labour market reaching a steady +150,000 gain per month during 2024. Taken together, this means continued expansion while keeping a lid on rates – at least not enough to force a rate hike. It all depends on global growth, especially across China and Europe…..

…..Speaking of Europe, the STOXX 600 reached its highest level following the US employment release. The index has rallied over +10% since 27th October following the widespread belief Central Banks are done with raising rates. On the back of lower forecasts of inflation, GS economists were amongst those to see faster cuts starting in April until the deposit rate reaches 2.25% by early 2025. They do not see recession – in fact, they see 2024 GDP at +0.80%. Inflation in the 1% to 3% range is good for equities. Valuations is still very low with the 12-month forward PE at just 12.5X. A major and ongoing concern has been the fiscal drag in Germany, especially following the court’s ruling that it is illegal to transfer some €60bn of unused funds from the pandemic assistance fund to other budgets. For 2024, a funding shortfall of €17bn to €19bn is expected (=0.50% of GDP). However, this is not likely to have the same impact at state level as first thought. Besides, it's not as if the government is left without options. For instance, green subsidies are high at almost €19bn while firm electricity subsidies are at €16bn. Recent discussions with the French have an agreement being “95%” of the way there.