Markets were back to risk-off mode – weekly update 10 December

Markets were back to risk-off mode – weekly update 10 December

Ben Seager-Scott
Published: 10 Dec 2018 Updated: 13 Jun 2022

A look back over macroeconomic and market events for the week ending 7 December 2018. Markets were back to risk-off mode last week, with equity markets reversing gains from the previous week. The US labour market report disappointed forecasts, but remained robust in absolute terms whilst business activity indicators were also strong. It’s a busy week ahead with an expected vote in the UK Parliament on the EU Withdrawal Bill – a key watch-point for sterling investors.

The US labour report was a disappointment

The US labour report was a relative disappointment, with the headline number of 155,000 jobs added in November falling short of the 198,000 expected and some way below the downwardly revised 237,000 jobs that were added in October. Unemployment held steady at 3.7% as expected, but underemployment ticked up from 7.4% to 7.6%.

Average hourly earnings were also short of expectations, rising 0.2% month on month (mom, 0.3% had been expected) with the previous reading revised down from 0.2% to 0.1%. However, despite the misses on expectations, in absolute terms the labour market is still robust with the 3.1% year on year (yoy) average hourly earnings still the fastest rate of growth post-global financial crisis.

PMI survey readings showed further US strength

Purchasing Manager Index (PMI) survey readings showed further strength in the US. The Institute for Supply Management reported Manufacturing PMI rising significantly from 57.7 to 59.7 (a slip to 57.5 had been expected), and Non-Manufacturing PMI rising from 60.3 to 60.7 (a slip to 59.0 was forecast).

With oil prices cooling, the input cost component softened, but the associated commentary continued to suggest tougher recruitment conditions, particularly in more technical roles. New orders and backlogs increased, highlighting some of the challenges around capacity constraints in the US, but new export orders declined amid the ongoing trade war.

UK PMI readings were more mixed

UK PMI readings were decidedly more mixed with a relatively negative undertone. Manufacturing PMI unexpectedly rose two points from 51.1 to 53.1 (51.7 had been expected), mostly driven by new contracts in the domestic market partly linked to stock-building ahead of Brexit as a buffer against potential supply chain disruption. Despite the strong headline reading, export orders continued to fall and businesses reported deteriorating optimism.

For the much larger Services sector, the headline PMI reading slumped from 52.2 to 50.4 (a pick-up to 52.5 was expected). New business and optimism levels were the lowest since July 2016, with businesses warning that consumption was weak and business investment was being put off amid Brexit uncertainty. In the report, the Chief Economist at Markit, the survey producer, noted that the only thing preventing service sector activity shrinking was firms ‘working through backorders to an extent not exceeded since 2009’.

Last week’s other events

  • In Germany, Annegret Kramp-Karrenbauer won the leadership contest for the CDU party, beating competition from Friedrich Merz, who had been hoping for a triumphant return to politics, and Jens Spahn the Health Minister. Kramp-Karrenbauer is largely seen as the continuity candidate and was the party’s general secretary, having been appointed by Chancellor Angela Merkel earlier this year. The victory means it is likely that Angela Merkel will be able to see out her term as Chancellor which ends in 2021
  • China’s Manufacturing PMI, as measured by Caixin, ticked up from 50.1 to 50.2 (no change was forecast) whilst Services PMI picked up significantly from 50.8 to 53.8 (a slip to 50.7 was forecast)
  • In the Eurozone, Retail Sales growth rose from a downwardly revised 0.3% to 1.7% yoy, but was below forecasts for 2.0%. The final reading for third-quarter GDP growth was revised down marginally from 1.7% to 1.6% yoy
  • In Japan, Labour Cash Earnings growth picked up from 0.8% to 1.5% yoy (1.0% was expected), but the Leading Index measure fell from 104.3 to 100.5 (104.9 was expected)

The markets

Markets were in near-full retreat last week, led by falls in the US equity markets.


The S&P 500 led the rout, shedding -4.6% during the course of the week. Europe ex-UK fell -3.5% and UK equities were down -2.9% (both on MSCI index measures). In Japan, the TOPIX index was down -2.8% while Emerging Markets were relatively robust, down just -1.2% (MSCI Emerging Markets).


The falls in equity markets were offset by sharp rallies in core sovereign bonds. 10-year US Treasury yields rallied 14 basis points (bps) over the week to close at 2.85%. Over the same period, 10-year UK gilt yields were 10 bps down to 1.27%. The equivalent German bund yields firmed up 6 bps to 0.25% and even Japanese Government Bonds participated with 10-year yields down 3 bps to 0.06%.


Oil had a small rebound last week as OPEC+ managed to agree some cuts to oil production, with Brent Crude rising to US$61.67 per barrel by the close on Friday. Gold continued to rally rising to US$1,249 per ounce, but copper was slightly softer, slipping to US$2.76 per lb.


There was relative strength in the Japanese yen and euro last week, with sterling and the US dollar broadly weaker (sterling slipped -0.2% versus USD). Sterling closed on Friday at US$1.27, €1.12 and ¥144.

The week ahead

It’s a very busy week ahead. While we usually start with the data schedule, for UK investors the main event is very likely to be the Parliamentary vote on the UK’s EU Withdrawal Agreement, currently scheduled for Tuesday (though it could be delayed). The passage of the bill is expected to be pretty arduous, and it seems unlikely to pass in its current form at the first attempt. We could well see short-term market noise around the event itself, and there are a lot of potential consequences in the aftermath of a defeat.

In terms of the economic release schedule, Thursday’s European Central Bank (ECB) monetary policy meeting is also likely to be closely watched as markets expect an end to the ECB’s asset purchase programme to be announced for the end of the year. In the UK, there will also likely be interest in Industrial Production on Monday (a slip to -0.1% yoy from flat is forecast) and then labour market data on Tuesday (see details below).

The US reports CPI inflation on Wednesday (a slowdown from 2.5% to 2.2% yoy is expected) while the Eurozone reports Industrial Production on Wednesday (0.8% from 0.9% yoy expected) and PMIs on Friday (composite PMI is forecast to rise from 52.7 to 52.8). Friday will also see US PMIs from Markit, US Retail Sales and the latest batch data release from China (including Retail Sales, Industrial Production and Fixed Asset Investment), see the details below. The daily breakdown is as follows:

Monday: As well as UK Industrial Production (covered above), we will also have the latest output from the Japanese Eco Watchers Survey and the Sentix Investor Confidence reading for the Eurozone.

Tuesday: In the UK, the labour report is forecast to show Average Weekly Earnings growth unchanged at 3.0% yoy, with the unemployment rate expected to stay at 4.1%. Later in the morning, the Eurozone reports the ZEW Survey Expectations results. In the afternoon, the US Small Business Optimism index is reported by NFIB and just before midnight Japan reports Core Machine Orders.

Wednesday: Eurozone industrial production and US CPI inflation are the only real releases of note, covered above.

Thursday: Whilst the focus for Thursday will be the ECB monetary policy meeting, there could also be some interest in the latest US trade data, due out in the afternoon. Late in the evening, Japan will release business activity and outlook data from the Tankan surveys.

Friday: The week closes with a bang in terms of data releases. Shortly after midnight, Japan reports Manufacturing PMI, followed a couple of hours later by the Chinese batch data release, where Retail Sales are forecast as rising 0.2% to 8.8% yoy, Industrial Production is expected to be unchanged at 5.9% and Fixed Asset Investment is forecast as increasing from 5.7% to 5.8% yoy (year-to-date basis).

Later in the morning, the Eurozone Composite PMI reading is forecast as rising marginally from 52.7 to 52.8. In the afternoon, US Retail Sales forecasts are anticipating a slowdown from 0.8% to 0.1% mom for November, but the Control Group, which strips out cars, fuel and construction materials, is expected to rise from 0.3% to 0.5%. Industrial Production is forecast to have risen from 0.1% to 0.3% mom. US PMIs from Markit are also due out, with Manufacturing PMI expected to dip from 55.3 to 55.1, whilst Services PMI is expected to rise from 54.7 to 55.0.


This article was previously published on Tilney prior to the launch of Evelyn Partners.