US Economy – Strength Continues
Friday’s job data surprised strongly to the upside, as 256k new jobs were added versus a 165k forecast. The unemployment rate fell by 0.1% back to 4.1% and average hourly earnings rose by 3.9% YoY, 0.1% less than last month. The totality of last week’s labour market data suggested a stable labour market, with solid sentiment. The JOLTS report showed a declining quits rate of 1.9%, below pre Covid levels, suggesting an easing labour market and guiding towards weaker wage growth. Friday’s University of Michigan consumer expectations survey showed rising inflation expectations of 3.3% for the 5-10Y period ahead, a level last seen only in 2008. With a resilient economy, this is very concerning for the Fed as it suggests potentially de-anchoring of inflation expectations. Fed speak was mixed, whereby Governor Waller suggested further cuts are on the table, while Governor Bowman indicated the December cut may have been the last in this cycle. This Wednesday we’ll see crucial US CPI data, where headline YoY is expected to rise from 2.7% to 2.9%, while core YoY is seen unchanged at 3.3%..
Trump – Heating Up
Last week offered a glimpse into policy under Trump. Initial Washington Post reports for narrower tariffs were promptly rejected, while Trump then suggested renaming the Gulf of Mexico to the Gulf of America and purchasing Greenland for geo-strategic reasons. As inauguration day approaches on January 20th, early executive orders will likely include border control, task forces around DOGE and geopolitics, trade negotiations/tariffs and energy policy. The views on tariffs vary widely, but the probability of large tariffs in the first six months are priced only at 36% in betting markets.
UK – Not a Fiscal Fiasco 2.0 (yet)
UK Treasuries sold off materially since the beginning of December, led by a hawkish repricing of US Treasuries following the election of Donald Trump, with UKT 10Y closing last week at 4.8% and UKT 30Y at 5.4%. The higher level of interest rates in the UK has narrowed the fiscal headroom for chancellor Reeves, who had only just created £9.9bn in her recent budget in October. The combination of rising debt servicing costs and lower GDP growth estimates is shrinking the headroom closer to zero. This changed the tone last week in UK markets, and so differently from the last months, the currency weakened last week along with Gilts, suggesting a sell-everything mentality in UK assets.
Algebris Investments’ Global Credit Team
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