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January 27, 2023

Optimism back in the markets on labor and inflation cooldown

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

 Financial markets at the beginning of 2023 are not very different from the ones in 2022. But the latest inflation and labor data in the US is bringing some hope. However, we might still be very far from the reversal of current interest rate policies. Attention of the markets goes to the elements that may determine Central Banks to shift their current policies.

Tomorrow (January 10)  we will see the National Bank of Romania rate decision. As in Romania latest inflation data shows an acceleration, the consensus is that we will see an increase of the reference interest rate with at least 0.25% taking it to 7%. The latest data about the industrial producer prices shows a 44.8% year on year increase on the domestic market and positions Romania third in the European Union after Hungary and Latvia. The unemployment in Romania continues to drop. The data for November shows an unemployment rate of 5.4%, lower with 0.1% than in the previous month. And this is putting pressure on wages. These are some reasons for the NBR interest rate increase policy to continue.

Inflation is the first indicator that is present in any central banker speech. The first data posted in 2023 is showing that inflation is decelarating in the Euro Area. In December 2022 Eurostat estimated the inflation to be 9.2% down from 10.1% in November. Across the Atlantic the inflation is also showing a deceleration for the fifth consecutive month to 7.1% in November.

But the latest FOMC minutes shows another element of concern for the Fed: nominal wage growth. This indicator continued to be elevated and remained above the pace judged to be consistent with the FOMC’s 2% inflation objective it is mentioned in the minutes. And the wage spiral in the United States is fueled by an unprecedented labor market situation where the total labor force is inferior to the number of available jobs. Currently there are 10.5 million vacant jobs. The number of unemployed people went down to 5.7 million in December 2022 and the unemployment rate decreased slightly to 3.5%. Nonfarm payrolls report shows that 223 thousands jobs were created in the US in December, the lowest figure in the last three months. Latest workforce data showing a slight cooling of the labor market followed by a bad ISM Services report brought back optimism in the market generating an over 2% increase in the all US Stock exchange indexes.

It is unlikely that the labor market situation will deteriorate steeply in the months to come. However, faced with increasing costs and a drop in demand, companies started to announce mass layoffs. The latest news reports about job cuts are mentioning Goldman Sachs (GS) that following a cost review is preparing to cut 3200 positions. Other news mentions Amazon (AMZN) that intends to layoff 18.000 workers, Salesforce (CRM) that intends to cut 10% of its workforce and Amdocs (DOX) wanting to cut 3% of its personnel.

Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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