Solid jobs report cements case for Fed hikes, keeps dollar in the lead
Yen slides to fresh two-decade lows after Japan’s upper house election
Wall Street futures flash red ahead of earnings season, busy week ahead
The dollar show
The pendulum in global markets continues to swing back and forth between inflation and growth concerns. Any good news on the economy stokes fears about rampant inflation while any bad news adds credence to recession risks, but the US dollar ends up victorious in both cases, either through bets for faster Fed rate increases or via safe-haven flows into the reserve currency.
All news has essentially been good news for the greenback, which has left a trail of destruction in the FX field. The euro has been steamrolled by the energy crisis that has deprived it of its historical trade surpluses, the yen has been crushed by monetary policy divergence, while sterling and the commodity-sensitive currencies have been prisoners of shaky risk sentiment.
A surprisingly strong US jobs report dispelled some worries around growth on Friday. Nonfarm payrolls easily overcame their forecast, although some other segments like participation were on the softer side. Employment data is a lagging measure of economic activity but even so, the fact that the labor market is still humming along added the final touches to market pricing for another triple-barreled Fed rate increase this month.
Yen back under pressure
Over in Japan, the nation’s ruling party scored a decisive victory in the elections for the upper house of parliament over the weekend. This was seen as a vote of public confidence in Prime Minister Kishida, just a few days after his predecessor Shinzo Abe was tragically assassinated.
Dollar/yen poked its nose above the 137 region for the first time in 24 years in the aftermath as the results suggested the political balance of powers would remain unchanged, allowing the Bank of Japan the freedom to keep yields pinned to the floor.
Three elements can turn the tide in the yen - domestic inflation fires up and the BoJ pivots, global recession risks dominate and foreign yields decline alongside energy prices, or the depreciation becomes unbearable politically and provokes FX intervention to flush out speculators. One way or another, there is some light at the end of the tunnel in this terrifying downtrend.
Brace for earnings
In the equity market, the latest recovery encountered some issues as the spotlight turned back to shock-and-awe Fed rate increases. Wall Street futures are flashing red on Monday, with market participants nervous ahead of what promises to be a stormy earnings season that will get started with big banks this week.
Earnings growth for the entire S&P 500 is projected at around 5% - 6% on a yearly basis, which seems like an easy target to overcome in an environment where inflation is running much higher. The real question is whether business executives will strike a cautious tone and lower guidance for the rest of the year, and most importantly, how much of this downgrade has already been priced into battered share prices.
In other news, Chinese tech stocks suffered another bruising selloff after regulators imposed fines on industry giants for failing to comply with some anti-monopoly rules.
The economic calendar for today is empty but the rest of the week is filled with exciting events. Inflation data from the US will provide investors with the latest clues in the Fed puzzle, while central banks in Canada and New Zealand are set to raise interest rates. British politics will be in the spotlight too as the Conservative party scrambles to select its next leader.