Summary The December employment report was generally encouraging. Nonfarm payroll growth slowed modestly but remained solid with a 223K monthly gain. More importantly for Fed officials worried about the inflation outlook, wage growth cooled in December, and the labor force participation rate ticked higher for both prime age (25-54) and older (55+) workers. Despite the directional improvement in labor supply, the labor market remains exceptionally tight. The unemployment rate fell two tenths of a percentage point to 3.5%, matching its lowest level on record since 1969. It will take more than just this report to convince the FOMC that supply and demand in the labor market are in healthy balance. Cooler hiring and a bump in labor supply The December jobs report brought further signs that the labor market is beginning to soften, but remains incredibly strong. Nonfarm payrolls increased by 223K in December, not far off the Bloomberg consensus forecast of 202K. Revisions to the previous two months were slightly negative on net. The 223K new jobs added in December was the slowest pace of job growth since December 2020, when a surge in COVID cases was weighing on the U.S. economy. Job growth was generally broad-based and was led by leisure & hospitality (+67K), healthcare (+55k) and construction (+28K). Information, which includes many tech-related industries, was an exception with payrolls slipping by 5K. Beyond the downshift in hiring, there were additional signs in the establishment survey that labor demand is gradually cooling. Employment in temporary help services declined by 35K in December and has fallen by 111K since July. The average number of weekly hours worked declined by 0.1 hour to 34.3 in December and also has been falling in recent months. With 12 months of complete data, nonfarm payroll growth averaged 375K per month in 2022, but all signs point to a material slowdown in job growth in 2023. Download The Full Economic Indicator

Summary Over the last few weeks, President Lula da Silva has moved forward with some of the fiscal policies that he not only campaigned on, but that also worried market participants. Recently, Lula has gathered support to raise constitutional spending limitations and enhance social spending, while he has also promoted the use of subsidized lending from state-owned development banks to drive economic growth. We believe this new direction for fiscal policy will ultimately be inflationary, and we now believe the Brazilian Central Bank (BCB) will delay easing monetary policy until Q3-2023. Moreover, financial markets believe BCB policymakers will resume the tightening cycle before cutting interest rates, which in our opinion presents investors will an opportunity to take advantage of a possible mispricing in Brazilian interest rates. Risks around our Brazilian real forecasts are also rising, and while we believe the currency can hover around current levels in the short-term and strengthen over the longer-term, more explicit evidence of an erosion of fiscal responsibility would prompt us to change our outlook on the Brazilian currency. Download The Full International Commentary

Summary United States: Economic Growth Remains on a Positive Trajectory, For Now During December, payrolls rose by 223K while the unemployment rate fell to 3.5% and average hourly earnings eased 0.3%. Job openings (JOLTS) edged down to 10.46 million in November. ISM manufacturing fell to 48.4 in December, while the services index unexpectedly dropped to 49.6. Construction spending increased 0.2% in November. The U.S. trade deficit narrowed to $61.5 billion in November. Next week: Small Business Optimism (Tue), CPI (Thu), Consumer Sentiment (Fri) International: Fiscal Policy Has Brazil Off to a Rocky Start Enhanced government spending has the potential to place Brazil's sovereign debt burden on a more unsustainable trajectory. With Brazil's public finances already in a precarious position and Lula now officially sworn into office, concerns regarding a lack of fiscal discipline are starting to materialize and shake confidence. Next week: Mexico Inflation (Mon), Brazil Inflation (Tue), Central Bank of Peru (Thu) Interest Rate Watch: Clear Message from December Minutes: Higher Rates for Longer The minutes from the Fed's latest policy meeting in December were released on Wednesday and highlighted a mildly-hawkish to neutral tone from Fed officials headed into last month's meeting. What stands out to us is the Fed's direct communication: Don't underestimate its reaction function. Expect rates to remain higher for longer. Credit Market Insights: The Housing Market is Collateral Damage As the Fed continues its inflation fight, elevated mortgage rates have crushed affordability for potential homebuyers. The Mortgage Bankers Association (MBA) reported that refinance mortgage applications fell 86.6% year-over-year in the last week of December, and applications for purchase were down 42.4%. While home prices have started to slide, we do not expect price declines as severe as the housing bust. Topic of the Week: House Arrest: What a Perilous Speaker Vote Means for the Budget The U.S. House of Representatives continues its quest for a speaker. On Tuesday, the chamber went to a second ballot for the first time in a century after Representative Kevin McCarthy (R-CA) fell short of the votes needed to secure the speaker position. Read the full report here

The US gained 223K jobs in December, below the "whisper" expectations A cooling labor market implies a nearing end to the tightening cycle.  Wages are sliding and implies the stickiest inflation is falling – and the Fed is watching. Overpromise, underdeliver – that explains the decline of the US Dollar in response to the Nonfarm Payrolls. While the labor report showed an increase of 223K jobs – above what the calendar showed –, it is below what investors had expected following robust leading indicators. ADP's figures and an upbeat employment component in the ISM Manufacturing PMI raise real expectations to roughly 250K. That explains the initial response, but there are deeper reasons to expect further falls. First, the trend in labor market growth is too the downside – December's 223K iks lower than 256K according to the revised data for December. It extends a trend of moderation.  Secondly, wage growth decelerated to 4.6% YoY, significantly below estimates. That is a huge sigh of relief for the Federal Reserve. The world's most powerful central bank went to lengths to explain that labor-related inflation is what it is focusing on. Why? First, non-core inflation such as energy and food prices are out of the Fed's control and are set in global markets. Price rises related to goods are falling thanks to the unsnarling of supply chains – the transitory inflation the Fed was talking about a long time ago. Another type of inflation is set to come down – housing, which is down due to the Fed's rate hikes, but the full effect will only be seen in 2023. What's left is called "non-shelter core services inflation" – things like getting help from an account, a haircut or anything involving people giving services. These all cost more – but this jobs report provides some optimism. I will go with a bold call – this jobs report opens the door to the Fed ending its tightening cycle in March. Officials will decide on a 25 or 50 bps hike in February according to the inflation report coming out on January 12, and will then do something similar in the following meeting.  Afterward, it is hard to see further increases to borrowing costs with a cooling jobs market. This is the beginning of the end of the Great Tightening of 2022, which spills into 2023 – but not much. 

After a choppy start to the new year, markets will be bracing for the next set of CPI data out of the United States next week amid ongoing unease about Fed policy. Inflation stats are also due out of Australia, while in the United Kingdom, monthly GDP numbers could stoke recession fears yet again. China’s economy will be at the forefront of investors’ minds too as the December economic indicators start rolling in. But a potentially bigger market-moving event is a gathering of central bankers in Sweden where Fed chief Jerome Powell will be participating. Will US CPI maintain its descent? Markets may have given up hope of an early Fed pivot but they are still not convinced that rates will have to be raised too high into restrictive territory. The consumer price index for December due Thursday will be the next vital release that will either bolster bets of a more aggressive Fed or undermine policymakers’ warnings of additional rate increases to come. Inflation is clearly on the way down in the US. The question now is: how long will it take for it to fall back to within the Fed’s 2% goal and is there a risk it could begin to creep back up again before reaching the target? The December CPI readings will further paint the picture on this. After falling to 7.1% in October, America’s inflation rate could drop below 7% in December for the first time in 13 months. The month-on-month rate is predicted to maintain the lowly pace of 0.1%, but the core measure could quicken slightly from 0.2% to 0.3% m/m. There will be further views on inflationary pressures on Friday from the University of Michigan’s closely watched consumer sentiment survey. Although consumer sentiment has barely recovered from all-time lows and only a slight pickup is anticipated in the index in January, the survey’s gauges of consumer inflation expectations have been more encouraging. Both one- and five-year inflation expectations confirm the recent peak highlighted by the other price metrics and if there is a further decline in January, this could lift sentiment at the end of the trading week. The US dollar has been directionless lately as the rising threat of the US economy tipping into recession has offset the boost from the Fed’s ultra-hawkish stance. It’s been somewhat of a similar story on Wall Street and stocks continue to struggle. But with concerns about weakening demand growing by the day, it will be difficult to get anything more than a short-term bounce in risk assets should the inflation figures undershoot expectations. Riksbank symposium eyed as Powell attends However, the dollar may find some love on Tuesday when Chair Powell is set to speak at an international symposium on central bank independence, organized by Sweden’s Riksbank. Other prominent speakers will include the Bank of England’s Bailey, the Bank of Canada’s Macklem and the Bank of Japan’s Kuroda, who will soon be departing from the central bank world like his host Stefan Ingves of the Riksbank. But all eyes will probably be on Powell, who has not made any public remarks since the December FOMC press conference. Given the theme of the symposium, it’s likely that Powell will refrain from commenting on domestic policy, but any fresh views on the interest rate outlook could lift the dollar. Are China’s woes over? Aside from Fed policy, another uncertainty weighing heavily on the markets lately has been China’s Covid response. After a year of endless shutdowns that have ravaged the Chinese economy, Beijing’s abrupt change of heart about zero-Covid policy has been bittersweet for the markets. Although military-style lockdowns are now a thing of the past, surging infections have meant that consumers are still not spending as much and businesses are being disrupted from workers calling in sick. Hopes of a quick economic turnaround have subsequently been dashed, with commodities such as oil taking a substantial hit from this reality check. However, if investors spot some signs of stabilization in the data towards the year end, this may be taken as a positive development. The first opportunity for this will come on Thursday with the December CPI and PPI publications where any uptick in price pressures would indicate a demand recovery is underway. On Friday, the latest trade numbers are due. In October and November, China was in the unusual position of reporting back-to-back yearly declines in both exports and imports, underscoring the unsustainability of zero Covid. Inflation data may pose upside risk for the aussie Any improvement in the December readings could buoy equities as well as the Australian dollar, as China is Australia’s biggest export customer. Domestically, CPI figures out on Wednesday will also be crucial for the aussie. Like in most countries, inflation appears to be peaking down under, but the Reserve Bank...

US CPI (Dec) – 12/01 – the last few months have seen US CPI fall from peaks of 9.1% in June to levels of 7.1% in November. This was well below expectations of 7.3% and a sharp fall from October’s 7.7%, offering a boost to those who think that the Federal Reserve may not have to go as hard, or as far on rate hikes this year. Core prices also subsided from 6.3% to 6% and could well slide further this week to 5.7%. Since then, some of that optimism has undergone a bit of a reset due to firmer wages numbers which do appear to offer some two-way risk to a narrative that wants to see the FOMC slow the pace of rate hikes to 25bps when they next meet on February 1st. Fed officials including Chairman Powell have insisted that rates need to go much higher and while markets remain sceptical of that narrative the calculation also needs to be made that many on the FOMC would rather err on the side of doing too much than too little and as such might be tempted to ignore the warnings signs of a hard landing. ECB Minutes – 12/01 – December’s ECB meeting caught a lot of people off guard when President Christine Lagarde signalled that while the 50bps rate hike signalled a slowdown in the pace of the rate hiking cycle it did not signal a sign the ECB was going soft on its inflation fight. On the contrary she spooked the markets by saying that the intention was to hike rates at successive meetings by at least 50bps for the next 3 meetings. This sparked a sharp rise in European bond yields amidst concerns that the ECB was about to make another big mistake, only 10 years after it made a similar error, hiking aggressively into a downturn. It is clear from the narrative coming from several ECB Governing council members that they want to put the inflation genie back in its bottle with several members arguing for a terminal rate in excess of 3%. While Lagarde acknowledged that there were sizeable differences on the governing council about how high rates need to go, there is a risk that the ECB might well overplay its hand. This could in turn provoke an even steeper downturn in order to assuage the deep concerns in Northern European countries about the stickiness around current levels of inflation and where there is a deep-rooted fear about high inflation levels. The publication of the latest minutes ought to give a deeper insight into how deep these splits are, and how much the ECB is prepared to push rates higher.  China Trade (Dec) – 13/01 – having seen the Chinese government do a screeching U-turn on its zero-Covid policy last month, there is little sign that this change is likely to have an imminent material impact in the short term. In November the various shutdowns, had a chilling effect on domestic demand, as well as China’s ability to act as the workshop to the world. Exports plunged in November by -8.9%, with some of the reasons well documented, with the unrest at the Foxconn plant in Zhengzhou being one well-documented example. Imports also plunged by more than expected at -10.6%, the worst month since May 2020, as Chinese domestic demand continued to struggle in the face of over 2 years of perpetual restrictions and lockdowns. The decision to ease restrictions in the face of rising popular discontent has had the effect of making the Covid problem worse in terms of infection as well as death rates as a largely unvaccinated population suddenly finds the virus ripping through it. This is likely to see further weakness in the December trade numbers, with exports set to slow by -12% and imports set to decline by -10%.           Sainsbury Q3 23 – 11/01 – post Christmas trading numbers are generally a decent bellwether when it comes to consumer spending patterns, and are likely to be even more so given how much tighter peoples budgets are now with the soaring cost of energy.  When Sainsbury reported in November the UK’s number 2 supermarket reported that H1 revenues rose 4.4% to £16.4bn, while profits before tax slid 29% to £376m. Total grocery sales rose 0.2% in H1, with all the gain coming in Q2, which saw sales rise by 3.8%. When general merchandise is included, the picture is less bright, with declines in Argos and Sainsbury GM and clothing. This was offset by a big increase in fuel sales. Total retail excluding fuel saw a decline of -1.3%, and including fuel, an increase of 4.4%. As we look ahead to this week’s Q3 updates it is worth noting that grocery price inflation of over...