Grab Your Box And Leave

New data out last week showed that the eurozone economy is proving to be more resilient than originally thought. And in updated forecasts, Goldman Sachs no longer sees the bloc entering a recession. Speaking of Goldman, the investment bank announced that it’s embarking on one of its biggest rounds of job cuts ever. After all, the banking industry is facing several headwinds including a major slump in dealmaking. So much so was apparent from Jefferies’ latest results, with the bank’s profit more than halving last quarter. But it’s not just old-school finance companies struggling: crypto firms are also feeling the heat as the industry continues to struggle in the wake of FTX's collapse, which has caused trading volumes to slump. On the back of that, crypto exchange Coinbase announced last week that it was laying off 18% of its workforce. Finally, the latest US inflation report showed a continued slowdown in price pressures, much to the delight of investors.

Macro

The eurozone’s labor market is displaying surprising resilience in the face of a widely expected economic slowdown stemming from high energy prices. So much so was apparent from data out last Monday that showed record-low unemployment in the eurozone. In November, there were 10.8 million unemployed people in the bloc – 2,000 fewer than the previous month and the lowest since records began in 1998. The unemployment rate, meanwhile, remained unchanged from October at 6.5% – the lowest since records began in 1995.

Economists are now worried that the tight labor market will boost wage pressures which would, in turn, push inflation upwards. That supports the view among traders that the European Central Bank (ECB) will be forced to continue to raise interest rates to battle high inflation. In fact, in an article published on its website last Monday, the ECB predicted that wage growth – a key indicator of where inflation is headed – will be “very strong” in the coming quarters, strengthening the case for more interest-rate hikes. Markets are pricing in a 50 basis point increase in interest rates when the ECB meets on the 2nd of February. That would come on top of the 2.5 percentage points of hikes already imposed since June last year.

Goldman Sachs, however, is not too worried: in new forecasts out last week, the bank’s economists see inflation easing faster than thought – to about 3.25% by the end of 2023. What’s more, they no longer predict a recession after the eurozone economy proved more resilient at the end of 2022, natural gas prices fell sharply, and China abandoned its Covid restrictions earlier than anticipated. The eurozone’s economic output is now expected to increase by 0.6% this year, compared with an earlier forecast for a 0.1% contraction. How will all this impact the ECB’s decision-making? In the economists' own words: “Given more resilient activity, sticky core inflation, and hawkish commentary, we expect the ECB to tighten significantly more in coming months”.

Moving over to the US, the latest inflation report out on Thursday showed consumer prices increased by 6.5% in December compared to the same time last year. Although that was in line with economists’ expectations, there was some good news in the data. First, it’s the smallest annual advance since October 2021. Second, it was a marked slowdown from November’s 7.1%. And third, on a month-on-month basis, consumer prices decreased by 0.1%. That was their first monthly drop since April 2020 and came on the back of a sharp fall in gasoline prices, which are now lower on a year-on-year basis. Core consumer prices, which strip out volatile energy and food components, advanced 0.3% from November and 5.7% from a year ago – the slowest pace since December 2021. Both these figures were also in-line with economists’ forecasts. 

Investors cheered the report as the continued slowdown in inflation – combined with prior months’ lower-than-expected readings – add to evidence that price pressures have peaked, putting the Fed on track to again slow the pace of its interest-rate hikes. But even if it does so, investors should be wary: Fed policymakers have emphasized the need to hold rates at an elevated level for quite some time and cautioned against underestimating their will to do so. In fact, investors are still betting that the central bank will cut rates by the end of the year, despite officials saying otherwise.

Stocks

Bankers at Goldman Sachs woke up to some bad news last Monday: the firm is embarking on one of its biggest rounds of job cuts ever as it presses ahead with a plan to eliminate about 3,200 positions – roughly 6.5% of its total workforce. More than a third of those will likely be from within its core trading and banking units, indicating the broad nature of the cuts. Broader industry trends like a slowdown in merger and acquisition (M&A) activity, lower asset prices, and an uncertain outlook for markets and the economy are prompting US banks to reduce costs. Goldman’s issues are compounded by its expensive foray into retail banking with its Marcus unit, which has seen losses pile up at a much faster rate than expected.

To put that slowdown in activity in perspective, consider that the world’s biggest investment banks endured their worst year for dealmaking and fundraising since 2016, as surging interest rates and slowing economic activity hit the sector. According to BCG Expand Research, the 100 biggest banks by revenue made $77 billion from M&A and equity and debt issuance in 2022 – a 38% drop from the previous year and the smallest amount in six years. That goes hand in hand with data by Bloomberg showing the value of global dealmaking slumped by about a third to $3.6 trillion last year.

Investment bank Jefferies offered an early snapshot of how the major banks fared last quarter. The firm reported its latest results last week and they weren’t pretty: its profit fell 57% in the fiscal fourth quarter, with total investment banking revenue collapsing 52% in the period amid a persistent deal slump that looks set to hit a key profit engine across Wall Street’s biggest banks.

But last year’s fast-changing macroeconomic environment has brought at least one piece of good news for banks: higher interest rates have allowed them to charge borrowers more for loans without raising the interest rates they pay depositors by as much. This has boosted their so-called net interest income – the difference between what they pay on deposits and what they earn from loans and other assets.

Crypto

Cryptocurrency exchange Coinbase is firing about 950 employees – or 20% of its workforce – as the crypto industry continues to struggle in the wake of FTX's collapse, which has caused trading volumes to slump. Coinbase’s CEO said the steps were needed to weather the ongoing crypto winter, which has coincided with a broader economic downturn. In June last year, the firm announced it was laying off 18% of its workforce, the equivalent of roughly 1,200 employees. It eliminated another 60 positions in November.

Coinbase is the latest crypto firm to announce redundancies so far this year. Earlier this month, exchange Huobi said it would cut 20% of its staff, while Silvergate, a crypto-focused US bank, said it would shed about 40% of its workforce, and digital-asset lender Genesis announced it was laying off 30% of its employees. Ouch…

This week

• Monday: The World Economic Forum kicks off in Davos
• Tuesday: Chinese retail sales (December) and GDP (Q4), UK labor market report (unemployment rate, average hourly earnings, etc). Earnings: Goldman Sachs, Morgan Stanley
• Wednesday: Bank of Japan interest rate decision (markets expect the central bank to keep interest rates unchanged at minus 0.1%), UK inflation (December), US retail sales (December)
• Thursday: US housing starts (December). Earnings: Netflix, Procter & Gamble
• Friday: Japanese inflation (December), UK retail sales (December), US existing home sales (December)