Chart of the Day
While the focus at the end of last week was on the US jobs report, one overlooked development was the surge in the prices-paid components of the ISM manufacturing and services surveys in December. An average of the two implies US inflation could surpass 3% this year, which would be very strong by recent standards. Part of this is already baked in because the annual price comparisons will be boosted by the large falls in prices earlier this year, but this acceleration in inflation will still come at a time when bond yields are already rising, and could therefore compound that trend.
US employment fell by 140,000 in December, but the breakdown was more encouraging than the headline figure. The loss was almost entirely due to a half-million decline in leisure and hospitality employment as a result of the pandemic and business closures, which will hopefully prove temporary. Higher-productivity sectors, including professional services, continued to add jobs at a solid pace.
It is still disappointing that the labor market recovery in the US has been much slower than in Canada, although the States’ northern neighbor was hit harder in December relative to the size of its population, as it shed 63,000 jobs.
Over in the eurozone, Friday’s data confirmed that German industrial production has recovered faster than in many other advanced economies.
Let’s focus on commodities, which saw some very interesting moves last week. Recall that real interest rates started rising after the Georgia runoff results, which was probably the catalyst for the slump in precious metals prices at the end of the week.
By contrast, oil and gasoline continued to rise. That’s likely a global growth story more than anything but, at the margin, it could also be due to the increased chance that President-elect Biden will be able to impose some environmental restrictions.
Gasoline has been the front runner over the past month, but several commodities are up by over 10%.
China’s credit impulse seems to bode well for further rises in commodity prices, although bear in mind that the YoY growth rates in almost all of them will surge in the coming months due to the falls in prices last year. Either way, that credit impulse is worth keeping an eye on, as China has shown some signs that it wants to tighten credit.
The latest CFTC Commitment of Traders report shows speculators are still short WTI compared to the long-term norm, which could leave scope for oil to rise further as more investors enter the trade.
Any further rises would likely push up longer-term bond yields further. Last week, the 10-year minus 2-year spreads in North America surged, again likely due to the increased chance of further fiscal spending, but the same was not true in Europe.
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