Politics Doesn’t Derail Policy Rate
US payrolls provided significant news in an otherwise characteristically calm start to December ahead of the pre-Christmas blizzard of releases. The 227k headline increase slightly exceeded the consensus, with upwards revisions compounding the good news, but the outcome arguably leaned dovish overall. Private payrolls disappointed at 194k and the unemployment rate’s rise to 4.2% almost rounded to 4.3%. Payback from hurricane and strike activity drives the rebound, with the average over the past two months relatively modest at 131.5k.
We believe these payroll data remain weak enough for the Fed to cut by another 25bp in its December decision. That outcome would also match the cut we expect the ECB to deliver next Thursday. Aligned rate cuts in December underlie our view that Europe’s underperformance is over-priced (see HEM: Shrinking Euro Doves). Labour cost rises remain above target-consistent levels while activity trends signal monetary policy as nearly neutral, so we still don’t see a need for a panicked 50bp ECB cut. It responded to downside news during October with a cut. Subsequent data have almost uniformly surprised hawkishly, reinforcing the signal that conditions aren’t too loose.
Meanwhile, in the UK, updated UK population estimates and projections drove a 402k upward revision to the employment level while unemployment was broadly unchanged. With output and wages unaffected, productivity was weakened into a slight trend decline while implied unit wage costs are 1.3pp higher and stuck above 5% y-o-y. Full typical passthrough to consumer prices reinforces the underlying inflation problem. The BoE should discount labour market data and cautiously hold rates in December (see UK Revisions Raise Inflationary Pressure).
Political risk has also percolated again over the past week. Attempts by French President Barnier to push policy changes through parliament were forcefully rejected in a confidence vote. Neither the left nor right-wing blocks are in a compromising mood. They are politically capitalising on the anti-democratic practices of the “far centre” (see Politics: The Far-Centre Will Fail). South Korea’s opposition also capitalised on President Yoon's sensationally misjudged imposition of martial law. Impeachment proceedings are proceeding with a much higher chance of now removing this unpopular President, albeit only replaced by the Prime Minister, at least temporarily.
Such trickery makes the otherwise disruptive Donald Trump almost look stable. President Biden’s sweeping pardon of his son also helps normalise lousy US political behaviour. So, the threat of punitive tariffs on China, Canada and Mexico over fentanyl proved to be no more of a wake-up call for investors than the nomination of Jamieson Greer as USTR. But Alastair Newton believes that Wall Street’s related faith in Scott Bessant’s ability to moderate trade policy may well prove misplaced (see China/US: Trading Blows Part 1).