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Markets steadier after NFP shock, but on alert for US CPI data

XM.COM

  • Dollar’s NFP-led rebound eases but US inflation still to come
  • ECB rate talk intensifies as euro eyes Lagarde testimony
  • Stocks mixed as Amazon boost capped by soaring bond yields

Dollar and yields settle down after NFP excitement

Markets got off to a relatively calm start on Monday following a tumultuous end to last week on the back of the shockingly strong jobs report out of the United States. Nonfarm payrolls jumped by 467k in January, confounding both the most pessimistic forecasts that the US economy would shed jobs as well as the top estimates.

Fears that the Omicron wave and the cold snap still affecting many parts of the country would curtail job hiring have clearly proved unfounded. Moreover, the Labour Department revised up the numbers for November and December by a staggering 709k. But the cherry on the cake for the inflation hawks was the bigger-than-expected rise in average hourly earnings, leaving investors and policymakers in no doubt that the labour market is red-hot.

Money markets are now pricing in about a thirty percent chance the Fed will hike rates by 50 basis points in March, with five increases fully priced in for the year. Treasuries slumped after the jobs data, lifting the 10-year yield to a more than two-year high of 1.9360%. The jump in yields helped the US dollar stem its four-day freefall.

The dollar index was extending its gains today, albeit at a slower pace. With other central banks also turning hawkish, the greenback is having to fend off tougher competition. However, with an economy that’s booming, the Fed is probably better positioned to hike rates very aggressively. Hence, all eyes this week will be on the latest CPI stats due on Thursday amid the anticipation of when inflation will peak.

Euro eases ahead of Lagarde testimony

The dollar’s biggest challenge to getting back on the front foot might come from the euro. The single currency shot higher last week, rallying by 2.7% after ECB President Christine Lagarde opened the door to a possible rate rise this year. Lagarde will be speaking in the European Parliament at a hearing before the Committee on Economic and Monetary Affairs later today and any comments on the normalization timeline will likely spur some euro volatility.

ECB Governing Council member Klaas Knot fuelled speculation of a Q4 liftoff in remarks over the weekend. However, the euro was paring its gains today, easing to around $1.1425 even as Eurozone government bond yields maintained their ascent.

The pound was softer too, having failed to break the $1.36 level last week after Bank of England Governor Andrew Bailey questioned the markets’ steep rate hike path.

The Australian and Canadian dollars were the exceptions on Monday, edging up against their US counterpart, while the Japanese yen was a surprise winner as well.

US stock futures turn lower

In equity markets, it was a very mixed picture across the globe. UK and German stocks were in the green in Europe, and in Asia, a strong performance in China after the week-long Lunar New Year break added some support to struggling shares in the region.

On Wall Street, however, e-mini futures were in negative territory, unable to build on Friday’s bounce back. The Nasdaq Composite perked up at the end of the week to close 1.6% higher, boosted by a surge in Amazon stock.

But unlike in previous earnings seasons, stellar results of one company are no longer able to spark a market-wide rally, while the stocks that disappoint are getting punished brutally as was the case with Facebook. The acceleration in the upward trend in long-term borrowing costs clearly has investors being more selective with where they allocate their funds.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-markets-steadier-after-nfp-shock-but-on-alert-for-us-cpi-data-154652
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