The December jobs report from the US Labor Department showed that higher interest rates may be finally starting to cool the labor market. The US economy added 223,000 new jobs last month, and while still higher than the pre-pandemic monthly average, that was the slowest rate of job creation in two years. Average hourly earnings rose 4.6% in December from a year ago, the slowest annual rate of increase in more than a year. The unemployment rate ticked down to 3.5% as the labor force participation rate increased slightly. Taken as a whole, the report showed a welcome early indication that the labor market may be starting to come off the boil, though it remains healthy. That is good news from the perspective of the Federal Reserve as it tries to rein in inflation while engineering a soft landing for the economy. US markets rallied strongly on Friday in reaction to the news, with the Dow Jones Industrial Average gaining 2.2%, the S&P 500 rising 2.4%, and the Nasdaq Composite surging by 2.7%. Government bonds rallied as well, with the yield on the 10-year US Treasury note dropping to 3.57% from 3.72% the day prior.
The S&P 500 had a historically bad year in 2022, ending with a loss just shy of 20%. That makes 2022 the worst year for the S&P 500 since 2008, and its fourth-worst year ever since the index was expanded to 500 companies all the way back in 1957. However, it is important to note that consecutive years of negative returns are very rare for the S&P 500. This has only happened during 1973 to 1974 and the three-year period of 2001 to 2003. Going back to 1957, the S&P 500 has had 18 calendar years where it recorded a loss. In the years following a down year, 14 out of 18 of those occurrences saw the index record a positive return. The S&P 500 has on average seen a gain of 15% in the years following a negative return. Of course, this is by no means a prediction for what will happen in any given year but is perhaps a reason for optimism heading into 2023.
So far, this winter is shaping up to be unseasonably warm in the Northern Hemisphere, particularly in Europe. In fact, on New Year’s Day at least seven European countries set new records for the warmest January weather ever recorded. Though the implications of this extreme heat in Europe are decidedly mixed overall, they have had the impact of decreasing demand for natural gas for heating. This is critical for the Eurozone economy as it wrestles with an inflation surge stemming from being cut off from Russian supplies of natural gas. The price for US natural gas futures for February delivery have now fallen 57% from the highs reached last summer. Natural gas prices now stand roughly at the same level as before Russia’s invasion of Ukraine. Recent European inflation readings for December came in below expectations for both France and Germany, largely due to lower energy prices. Eurozone government bonds rallied across several major economies on optimism that easing inflation may allow the European Central Bank to eventually slow its aggressive pace of interest rate hikes.
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