US labor market remains resilient, continues to exceed expectations

Geopolitical tensions could have consequences for European economy

KUWAIT: The Institute of Director’s (IoD) confidence index showed that the gap between economy-optimists and economy-pessimists has fallen to -28 in December from -21 in November. The figure indicates that company directors are getting back to their pessimistic stance on the economy, as they start to hesitate to take investment decisions. “Although aspects of the business environment have improved in the last couple of months, particularly with regard to inflation, this is not yet exerting a meaningful impact on business decision-making,” IoD policy director Roger Barker emphasized that for significant economic growth to happen in 2024, “business is in dire need of a boost.”

Adding more signs that the resilient US jobs market is steadily cooling, openings fell in November to their lowest level since March 2021. There were 8.79 million job openings in November, down from October’s upwardly revised 8.85 million and roughly in line with expectations of 8.77 million openings. Openings fell by 62,000, though the rate of vacancies as a measure of employment was unchanged at 5.3 percent. Economic activity is beginning to show signs of cooling as interest rates remain at a 22-year high. The ratio of job openings to available workers fell to 1.4 to 1, still elevated but down sharply from the 2 to 1 level seen throughout 2022.

ISM manufacturing PMI

The latest reports showed that the US manufacturing sector is still in contraction. The ISM manufacturing report for December registered a reading of 47.4 (anything below 50 indicates a contraction), up 0.7 points from November and slightly stronger than the 47.2 estimate. Meanwhile, employment rose to 48.1, a strong 2.3-point monthly increase.

The latest to come out of the Federal Reserve is that we might have certainly seen the end of the interest rate hike cycle and have entered the phase of anticipating rate cuts. Fed officials have affirmed that progress has been made in the battle to bring down inflation. “In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves,” the minutes said. The ever so cautious Federal Reserve reiterated “the importance of maintaining a careful and data-dependent approach to making monetary policy decisions.”

In December, more workers were hired than expected, with the latest Non-Farm Employment change showing that a hefty 216K workers were hired versus the expected 168K figure. The bulk of jobs added in recent months have largely been in a small number of sectors, mainly leisure and hospitality. The latest report indicates that markets expectations for the Federal Reserve to start cutting rates in March are somewhat premature. On an annual basis, 2.7 million jobs were added in 2023, as opposed to the 4.8 million jobs added in 2022, proving that the tightness of the labor market is in fact cooling down following the Fed’s vigorous rate hike cycle. Additionally, the unemployment rate was unchanged at 3.7 percent. Similar to the previous month, average hourly earnings rose 0.4 percent in December. The US Dollar index closed the week at 102.412.

Eurozone Inflation

The latest CPI reading to come out of the Eurozone was in line with the European Central Bank’s expectations, at 2.9 percent. This backs the ECB’s case to keep interest rates higher for longer, despite markets’ expectations of swift rate cuts. The ECB believes that inflation had reached a low point of 2.4 percent in November and will now roam around the 2.5 percent -- 3 percent range before falling to its 2 percent target in 2025. Global political tensions are playing a major role in impacting prices and that could have longer-term consequences for the European economy. Nevertheless, markets are still expecting the ECB to cut interest rates six times this year, while policymakers argue that

this will not be the case.

China Caixin manufacturing PMI

In China, the Caixin General Manufacturing PMI unexpectedly climbed to 50.8 in the latest publication released in December, exceeding expectations of a drop to 50.4. The data shows an increase in output at the fastest pace in 7 months, as well as an increase in new orders which rose to its highest level since February. Meanwhile, new export orders fell at the softest pace in seven months, and purchasing activity stagnated. The USD/CNY currency pair ended the week at 7.1395.

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USD/KWD closed last week at 0.30735.