Dollar grinds higher as traders step up Fed bets after jobs numbers
Stocks struggle for direction, lots of conflicting signals to digest
Euro finds no solace from sizzling inflation, RBA decision next
Dollar smiles after jobs data
The US labor market put in another impressive performance in March. Nonfarm payrolls clocked in at 431k as hiring remained strong, the unemployment rate fell to 3.6%, and more workers returned to the labor force thanks to the allure of rising wages.
Quite frankly, the American job market is on fire. Businesses are struggling to find suitable workers and it is becoming harder to retain talent, which is why salary growth is finally firing up. This is a feature of a booming economy but it also means the Fed will need to act with force to break the wage-price feedback loop and prevent an inflationary tornado.
Market participants responded by ramping up bets for rate increases, catapulting the yields on short-term Treasury notes even higher and putting the wind back into the dollar’s sails. Money markets currently suggest the Federal funds rate will end the year at 2.5% as the Fed slams on the brakes to prevent the economy from overheating.
Stocks caught between narratives
Over on Wall Street, traders have been overwhelmed by several narratives clashing together. There is a great deal of speculation about tighter monetary policy sparking a recession after the yield curve inverted recently, yet incoming data reaffirm the US economy is firing on all cylinders.
This is a tricky environment for equities. The bond market is saying the risk of an ‘accident’ is very high as rising rates could break a financial system that’s swimming in leverage, but on the other hand, the economy is booming and real yields are still negative.
Hence, equity investors have little choice but to ‘hold on’. With bonds selling off and commodities at the mercy of geopolitics, there just aren’t many attractive investment opportunities outside of the stock market. That sets the stage for some choppy trading, until it becomes clearer whether a recession is really on the cards.
Euro, gold, and the aussie
Meanwhile in the euro area, inflation printed an eye-watering 7.5% in March as spiralling energy and food costs spilled over into consumer prices. This puts the European Central Bank in a real pickle, as the darkening growth outlook doesn’t allow for lightning-fast rate increases to rein inflation in.
The euro has been left out to dry as a result, with hopes for a ceasefire also being dialed back after Ukraine accused Moscow of war crimes. Besides the war, the next big theme for the single currency may be the French election, which will be in the spotlight ahead of the first voting round on Sunday.
In the commodity arena, gold prices took minimal damage from the latest spike in yields and the recovery in the US dollar. This is a relative ‘victory’ for gold, which continues to trade sideways, absorbing the latest Fed repricing with flying colors - certainly much better than other safe havens like the yen or bonds that have been decimated lately.
Finally, the Reserve Bank of Australia will conclude its latest meeting early on Tuesday. Not much is expected, so this meeting could produce some surprises. The Australian economy has improved by leaps and bounds, leading market participants to price in eight rate increases for this year. Yet the central bank continues to preach patience.
It is probably time to open the door for raising rates, although policymakers may try to tone down market expectations by signaling a slower pace of tightening than what’s currently priced in.