US Economy – March cut remains priced
The US added 216k jobs in December, above the 175k forecast, driven by stronger private payrolls in health care, leisure and hospitality. The unemployment rate remained unchanged at 3.7%, while average hourly earnings rose 4.1% YoY, 20bps above forecast. ISM services fell from 52.7 to 50.6, while the manufacturing survey rose from 46.7 to 47.4. Last week’s data shows a slowing but resilient economy, yet leaving rates markets convinced that the Fed cutting cycle can start in Q1: The March cut is priced to 70%. This Thursday, CPI is expected to rise from 3.1% to 3.2%, while surveys see core falling from 4.0% to 3.8%.
Eurozone – Inflation slows further
Core inflation fell in December from 3.6% to 3.4% YoY, as service inflation was unchanged at 4% while goods inflation fell from 2.9% to 2.5% YoY. Energy prices rose year-on-year, mostly due to German energy subsidies paid out in December 2022. Headline inflation at 2.9% was in line with forecasts, while the MoM print of 0.2% annualises to a reading of 2.4%. The market is sceptical of March cuts for the ECB amid a stronger wage outlook in Q1, but prices 33bps of cuts until April in total. This week’s confidence data and ECB minutes will give further hints if Q1 cut pricing for the ECB is appropriate or too early.
Red Sea – Disruption continues
Despite the military presence of the US, UK, and France, Houthi attacks on cargo ships persist. Most major carriers are rerouting around Africa, adding 4-16 sailing days depending on the destination. This rerouting, which could absorb 6% of global container vessel capacity, has led to a surge in shipping prices, as the longer sailing time and the one-off effect of delayed arriving ships will lead to a capacity shortage leading up to the Chinese New Year and to port congestions in Europe, Red Sea, and US West Coast. Going forward, the best-case scenario is that some carriers feel safe enough to go through Suez under military escort by February, but carriers are now more risk-averse after the Maersk incident. The worst-case scenario involves direct involvement by Iran, with the added risk that Iran has supplied weaponry to Algeria which can hit shipping through the Strait of Gibraltar.
Algebris Investments’ Global Credit Team
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