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U.S. labor market expected to power ahead but with only modest wage gains
U.S. ISM non-manufacturing index expected to edge higher
U.S. trade deficit expected to widen to 5-3/4 year high
Eurozone CPI expected to remain stable
U.S. stock rally led by tech and FANG stocks

U.S. labor market expected to power ahead but with only modest wage gains — The consensus is for today’s Dec payroll report to show an increase of +190,000, down from Nov’s +228,000 report but stronger than the 12-month trend increase of +173,000. Payrolls showed a very weak increase of +38,000 in September due to hurricane disruptions, but then rebounded with strong reports in Oct (+244,000) and Nov (+228,000).

Expectations for a solid payroll report today were supported by yesterday’s news that Dec ADP employment rose sharply by +250,000, much stronger than market expectations of +190,000.

The consensus is for today’s Dec unemployment rate to be unchanged from November’s 17-year low of 4.1%. The unemployment rate is already at the 4.1% level that the FOMC is forecasting for 2018-19 and is below the FOMC’s estimate of a long-run unemployment rate of 4.6%.

Despite the tight unemployment rate, wages have yet to accelerate. The consensus is for today’s Dec average hourly earnings report to be unchanged from Nov’s +2.5% y/y, which is below the 8-1/2 year high of +2.9% posted in Dec 2016. However, wages are likely to move higher in coming months since the labor market remains tight and since minimum-wage hikes took effect on Jan 1 in 18 states.

Today’s Dec unemployment report is likely to show a strong labor market that will keep the Fed in a hawkish mood in 2018. We continue to believe that the market is underestimating the extent of Fed rate hikes in 2018. The market is discounting only two rate hikes, less than the FOMC forecast for three rate hikes.

U.S. ISM non-manufacturing index expected to edge higher — The market consensus is for today’s Dec ISM non-manufacturing index to edge higher by +0.1 point to 57.5, stabilizing after the fairly sharp -2.7 point drop to 57.4 seen in November. In a positive sign for today’s report, the Dec ISM manufacturing index, which was released this past Wednesday, rose by +1.5 points to a 3-month high of 59.7.

Looking ahead, U.S. business confidence should show solid gains in January as the ISM surveys pick up fresh business optimism from the Congressional passage of the tax-cut bill in late December. Business confidence should be bolstered by (1) increased business cash flow after the sharp cut in corporate and business pass-through tax rates, (2) increased capital spending since the tax bill allows full expensing of capital equipment purchases for the next five years, and (3) record highs in the U.S. stock market that illustrate investor confidence.

U.S. trade deficit expected to widen to 5-3/4 year high — The market consensus is for today’s Nov U.S. trade deficit to widen to -$50.0 billion from -$48.7 billion in October. The expected Nov trade deficit of -$50 billion would be the widest deficit in 5-3/4 years and would be moderately wider than the 12-month trend average of -$46.2 billion.

The U.S. trade deficit in October widened to -$48.7 billion from Sep’s -$44.9 billion mainly because of strength in imports. U.S. imports rose sharply by +2.8% in Sep-Oct and were up by +7.0% y/y in October, which was substantially stronger than export growth in that month of +5.6% y/y. U.S. imports are being boosted by the strong U.S. economy and by the +46% surge in oil prices seen since mid-2017 that has boosted the value of imported oil.

The wider U.S. trade deficit will be noticed at the White House and may increase the risks for protectionist trade actions in coming months. However, the wider deficit is not likely to have much effect on the dollar. An average of $1.2 billion worth of dollars flows out of the U.S. every calendar day due to the trade imbalance. However, those excess dollars are a drop in the bucket for the FX markets, which trade an average of $5 trillion worth of currencies every day with 88% of that trade involving U.S. dollars, according to the BIS.

Eurozone CPI expected to remain stable — The market consensus is for today’s Eurozone Dec CPI to ease slightly to +1.4% y/y from Nov’s +1.5%. However, the core CPI is expected to edge higher to +1.0% y/y from Nov’s +0.9%.

The Eurozone core CPI this year has remained within the soft range of 0.7%-1.2%, which is well below the ECB’s inflation target of just under 2%. The ECB continues to regard inflation as weak and has already announced that its QE plan will run at 30 billion euros per month during Jan-Sep 2018. The ECB will decide later whether to continue QE into Q4-2018 at a slower pace of perhaps 15 billion euros per month.

U.S. stock rally led by tech and FANG stocks — The U.S. stock market this week has rallied sharply to new record highs largely because of investor positioning in the new year with optimism about the strong global economy and the U.S. corporate tax cut bill that took effect on Jan 1. The market consensus is for SPX earnings growth of +12.0% in 2018, which would match the expected +12.0% gain seen in 2017.

The stock market has also been led higher by renewed strength in tech and FANG stocks. While the S&P 500 index this week has rallied by +1.98%, the Nasdaq 100 has shown a larger gain of +2.94%. The FANG stocks have been even stronger with a +4.53% rally so far this week in the NY FANG+ index.

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