Strong US jobs market undermines case for rate cuts

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Today’s top stories

• Eurozone inflation rose to 2.9 per cent in December, reversing six months of consecutive falls and dampening hopes of interest rate cuts from the European Central Bank. Inflation in Germany, the bloc’s biggest economy, accelerated to its fastest rate for three months.

• China’s trade spat with Brussels escalated as it launched a new investigation into French brandy imports. It follows the EU’s move to investigate Beijing’s support for the electric car industry.

• Shipping company AP Møller-Maersk said it would reroute ships from the Red Sea around Africa “for the foreseeable future”, after Houthi militants in Yemen escalated their attacks in the region. Container shipping rates have shot higher this week and economists have warned that disruption could lead to higher inflation for the world economy.

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Good evening.

Official data showing that the US jobs market was stronger than expected has undermined the case for the Federal Reserve to begin cutting interest rates as soon as March.

Some 216,000 posts were created in December, up from a revised 173,000 in November. Unemployment held steady at 3.7 per cent.

Markets initially sold off on the news, fuelling what had been one of the worst starts to the year in a decade for global stocks and bonds.

The trend, however, was reversed later in the morning on publication of ISM data, highlighting a slowdown in the services sector and reviving hopes that the Fed could after all begin cutting rates sooner rather than later.

The monthly jobs update comes amid a fierce debate among economists and policymakers about how quickly and when the Fed should start reducing interest rates. Most Fed officials, according to minutes published on Wednesday of their last policy meeting, wanted to keep borrowing costs high “for some time”.

The strength of the labour market, also highlighted by data yesterday showing initial jobless claims — a proxy for lay-offs — falling more than expected, was welcomed by President Joe Biden, who has been keen to highlight his record on jobs ahead of his re-election campaign.

Pay has also risen above headline inflation and is up by 4.1 per cent over the past year. “This morning’s report confirms that 2023 was a great year for American workers,” Biden said.

Need to know: UK and Europe economy

UK Prime Minister Rishi Sunak appears to have plumped for a general election in the autumn rather than spring.

Sunak will be cheered by new mortgages and services data indicating the economy ended the year in better shape than previously thought. House prices meanwhile rose for the third month in a row, according to lender Halifax. As housing affordability rises up the political agenda ahead of the UK’s general election, here’s a new explainer on where mortgage rates are heading.

For help with property purchases you can sign up to our new six-part newsletter series Sort Your Financial Life Out with Claer Barrett.

UK ministers set out bigger post-Brexit subsidies for farmers but businesses on both sides of the Channel warned of a “disaster waiting to happen” over new border checks.

The outgoing head of the UK’s debt management office said politicians should be wary of provoking a financial market backlash by increasing borrowing too quickly.

Confidence is growing that the EU can finally end fossil fuel imports from Russia after new data showed deliveries of Russian liquefied natural gas dropped last year after a surge in 2022.

Climate change is leading European holidaymakers to switch to more northern, cooler destinations and causing the travel industry to rethink its tourism calendar.

Need to know: global economy

Asia business editor Leo Lewis says Japan’s focus on protecting itself from natural disasters such as the recent earthquake is reflected in the business world, where survival has become an end in itself. A new generation of investors however would much prefer a focus on shareholder value.

Columnist Soumaya Keynes details how convergence between rich and poor countries has stalled and pessimism about development has increased amid the modern era of climate change, higher interest rates and frail democratic institutions.

Is the west talking itself into decline? That’s the thesis explored by John Burn-Murdoch by comparing the published use of terms related to progress, improvement and the future with those related to threats, risks and worries.

Need to know: business

China launched a new stock index to prioritise growth sectors such as renewables and chips. US investors are betting on a Chinese market rebound in 2024, despite the failure of fiscal and monetary support thus far to rejuvenate the economy.

As we reported in the last DT, there’s a bumpy road ahead for electric vehicles. New data showed growth in the UK in 2023 stalled for the first time, raising concerns that buyers remain sceptical of the new technology and are concerned about higher prices.

War in Ukraine is driving up business at arms companies such as BAE, while western sanctions are forcing Russia to explore new ways of stocking its arsenal: here’s how a bread factory is now churning out killer drones.

The Energy Source newsletter (for Premium subscribers) details five trends likely to dominate the sector this year, from oil prices and M&A to renewables, reshoring and US dominance in liquefied natural gas.

And if you can’t get enough of those guides to the year ahead, here’s Philip Coggan on what investors can expect from 2024 and Ruchir Sharma’s top 10 trends to look out for in the global economy from the growing backlash against immigration to the dollar’s decline.

Science round-up

Unusually warm sea temperatures that have fuelled wind and rain around the globe are set to be followed by more turbulence during January as climate change exacerbates the effects of the El Niño weather phenomenon.

The warmer than usual start to winter has also driven ice cover to its lowest level for 50 years in North America’s Great Lakes. Low cover across the world’s largest group of freshwater lakes can trigger extreme weather effects across the north-eastern US and southern Canada.

Physics professor Minna Palmroth says carbon emissions from research are the price we must pay to understand the world. Emissions in Germany have fallen to their lowest levels since the 1950s — mainly because of manufacturing moving abroad.

A new drug from Swiss pharmaceutical company Roche has offered hope in the fight against antibiotic-resistant “superbugs” after it successfully targeted a bacterium that causes life-threatening infections in hospital patients.

Novo Nordisk has signed deals worth up to $1bn with US biotech start-ups developing treatments for obesity and other cardiometabolic diseases, as the Wegovy manufacturer seeks to stay ahead in a major new market. The rising use of medications for weight loss has sparked supply fears for diabetics’ drugs.

The UK has now rejoined the EU’s €95.5bn Horizon science programme after a three-year absence but faces its first big test with a deadline on January 17 to “pump-prime” new applications. Japan is investing in UK life sciences for the first time with funding for a project that backs advanced treatments such as cell and gene therapies. 

Can technology’s “zoomers” outrun the “doomers”? Innovation editor John Thornhill considers how far AI’s transformation of scientific discovery has bolstered the case for optimism.

Some good news

US researchers have claimed a breakthrough in the treatment of PTSD and traumatic brain injuries in military veterans with a psychedelic drug called ibogaine. Few therapies so far have been effective at diminishing the long-term effects of such problems.