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Market Update
Markets have entered into their characteristic pre-NFP lull, with major asset classes for the most part going sideways as traders refrain from placing any big bets ahead of the key data release. For reference, it was a mixed Asia Pacific session, with the main Australian bourse rising amid some technical correction on recent losses and Hong Kong shares surging amid hopes that developers would get more economic support from authorities. The region’s main property index was up 4.6% on reports that China plans to exclude debt accrued from acquiring distressed assets when assessing debt ratio compliance. But the positivity in some indices in the region has largely failed to translate into European and US equities; the Stoxx 600 is trading a touch lower around 487, still down about 1.6% from last week’s record highs above 495 and S&P 500 futures are flat and remain within yesterday’s ranges close to the 4700 level, nearly 2.5% below recent record highs.
Analysts are assessing whether today’s US jobs report might stoke further speculation about near-term Fed tightening, thus potentially stoking further upside in yields and thus driving further underperformance in big tech/so-called “growth” stocks versus so-called “value” and “cyclical” stocks that respond positively to a higher rate environment. If this was to be the case during Friday’s US session, analysts note that we might not only see outperformance of say the Russel 2000 and Dow versus the Nasdaq 100, but also in European versus US equity indices, given that major European indices like the Stoxx 600 are much less weighted towards tech and growth names. Speaking of rates, US bond yields are currently flat with the 2s around 0.87%, the 10s around 1.72% and 30s around 2.08%. German 10-year yields are flat in the -0.05% area. According to Michael Leister, head of interest rates strategy at Commerzbank, “the aggressive sell-off in real yields and break-evens summarises market fears of accelerating tightening… With today’s flash (Eurozone inflation) and (non-farm payrolls) to add to the current policy angst, yields hold more upside”.
The flash estimate of HICP inflation in the Eurozone in December was released this morning and showed inflationary pressures in the bloc rising unexpectedly to 5.0% YoY from 4.9% in November versus forecasts for a drop to 4.7%. The core measures also rose unexpectedly to 2.7% from 2.6% versus forecasts for it to remain unchanged. As Reuters puts it, the data will likely make “for more uncomfortable reading at the European Central Bank, which has consistently underestimated price pressures and come under fire for this from some of its own policymakers”. But ahead of NFP, equity, bond and FX markets have not reacted, nor was there a reaction to German trade figures which showed exports growing in November despite ongoing the ongoing impact of supply chain snags, though German industrial output for the same month was shown to have dropped.
Taking a quick look at the lay of the land in FX markets, things are unsurprisingly pretty flat as is the case in other asset classes with GBP outperforming modestly and up about 0.2% to leave GBPUSD at 1.3550, still within recent ranges, with the currency only lagging SEK and NOK in terms of performance thus far on the session, with the latter up about 0.4% as it takes impetus from ongoing strength in crude oil prices. Indeed, WT continues to trade in the $80.00 area aided by OPEC+ supply problems (namely the recent shortfall in output in Libya) and worries about the unstable situation in Kazakhstan), but the Loonie is failing to garner any impetus on Friday, given the looming Canadian jobs report that will come out at the same time as the US report. CAD is flat versus the buck on the day with USDCAD just above 1.2700, while NZD, EUR, JPY and AUD are all also flat, with NZDUSD close to 0.6750, EURUSD close to 1.1300, USDJPY just under 116.00 and AUDUSD near 0.7150. Some FX strategists have been surprised at the dollar’s failure this week to rally despite a sharp rise in US bond yields (real and nominal), though some have suggested that the buck bulls may be waiting for the “green-light” to pile in and chase USD higher in wake of a strong jobs report.
Day Ahead
At 1330GMT the all-important US December jobs report is out. Newswires show median forecasts for the headline non-farm payrolls number are between 400-450K. The unemployment rate is seen dropping to 4.1% from 4.2%. As revealed by the recent minutes of the December policy meeting and recent public rhetoric from Fed policy makers, the bank sees the US labour market as very tight at the moment. Yes, total employment levels are well below pre-Covid-19 levels, but the persistence of the pandemic is holding a substantial portion of the workforce back from re-entering the labour market. As a result, there is a massive labour shortage (as noted by business for months) which the Fed is starting to recognise carries inflationary risks (via increasing the risk of persistent wage inflation). Realising that labour force participation isn’t going to rocket back to pre-pandemic levels anytime soon, the Fed is increasingly viewing the current state of the labour market as at, or very close to “near-term” full employment.
The Fed minutes reveal strong support for the Fed to begin lifting interest rates soon if the labour market continues its recent rapid progress. Given that last month only saw just over 200K jobs added to the US economy, the bar for today’s jobs report to meet the Fed’s definition of rapid progress is seemingly very low. If the NFP number came in in line with consensus, that would easily meet the mark. More importantly, measures of economic slack such as the unemployment rate, will need to remain at current levels or continue lower to meet these criteria. Today’s US jobs report will be viewed primarily in the context of how it affects the probability of a March rate hike from the Fed. If it is seen as bolstering the case for a March hike, then that may trigger further upside in US yields, downside in big tech and growth stocks and, if things really start to get risk-off, we could see FX markets adopt a defensive bias. The dollar hasn’t yet benefitted in wake of recent hawkish Fed vibes but may start to in wake of a strong US jobs report.
In terms of other notable data out today, there is also the Canadian December jobs report at 1330GMT that Loonie traders in particular will be watching. We than have a smattering of Fed speak including from Daly, Bostic and Barkin during the US session, as well as the widely followed Canadian Ivey PMI report at 1500GMT.
