"Heavy Symbolism": Hamas-Israel Conflict Risks Engulfing More Of The Region

By Stefan Koopman, Senior Macro Strategist at Rabobank

Heavy Symbolism

European stocks fell further on Wednesday, taking a cue from the negative mood on Wall Street. The Stoxx 600 dropped almost 0.9%, even as the incoming flow of macro-economic data should actually have been supportive of risk appetite. The S&P 500 closed 0.8% down too, continuing its losing streak. This morning, however, the mood improves slightly, with European futures gaining about 0.3%. Yields are also retreating this morning, after the 10-year UST briefly surpassed 4% yesterday.

Geopolitics was, again, quite nasty. Iran said that the two bomb attacks in Kerman, which had a large number of casualties, were aimed at punishing its stance against Israel. The attacks came hours after the deputy leader of Hamas was killed in an apparent Israeli drone strike in Lebanon.

Responsibility hasn’t been claimed yet, and it all still feels tail-risky in terms of direct US-Iran confrontation, but the symbolism of two explosions near the tomb of Iranian general Qasem Soleimani is quite heavy. Note too that the White House is reportedly reviewing options for a more robust military response to the attacks on shipping in the Red Sea, including strikes against Iran-backed Houthi targets in Yemen.

It all signals that the conflict between Hamas and Israel risk engulfing more of the region.

As expected, the minutes of the FOMC meeting on December 12-13 were not as dovish as Powell’s post meeting press conference. Instead, these contained a few hawkish reminders. The FOMC participants generally stressed the importance of maintaining a careful and data-dependent approach, reaffirming that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down towards the 2%-target. That might take longer than anticipated. Meanwhile, the risk of fresh inflation flare-ups keeps the door open to new rate hikes. We continue to pencil in the first rate cut in June. Once started, we expect the Fed to continue with one cut of 25 bps per quarter. Please find Philip Marey’s write-up here.

As said, the macro-economic data should actually have been supportive of risk appetite. Unfilled job vacancies in America fell to 8.79m in November, the lowest since early-2021 and the fourth consecutive monthly drop. Over the previous four months, 707,000 openings disappeared, a sign of weakening demand for workers. The ratio of unemployed workers to job openings, known as the V/U-ratio, stabilised at a still-high 1.4, down from nearly 2 a year earlier.

Crucially, the quits rate, which tracks voluntary leavers as a share of employment, edged down to 2.2%. This is the lowest level since September 2020. Workers are no longer quitting their jobs in droves to seek better pay elsewhere. This suggests that wage growth will continue to moderate in the coming quarters, as employers face less pressure to attract and retain staff. The silver lining of it all is that the decline in openings and quits coincides with layoffs hanging around at a very low 1.0%. This bodes well for a soft landing with a relatively benign disinflation.

While the labor market is cooling down, so too is the manufacturing sector. The ISM index came in at 47.4 in December, indicating contraction for the 14th consecutive month, but this was still slightly above expectations. A crucial component of the index, the prices paid measure, came in at 45.2 and stayed below 50 for the eighth month in a row. That signals persistent disinflation in goods prices. Furthermore, although none of the six biggest manufacturing industries registered production growth in December, the survey comments also had some silver linings, with several industries projecting a pick-up in demand and solid business conditions.