Friday’s unemployment report from the US was strong. It could’ve gone either way, but it went well. The US economy added nearly 200,000 non-farm jobs in November, average earnings were higher than expected on a monthly basis, but stable around the 4% level on an annual basis. That’s twice the Federal Reserve’s (Fed) inflation target and sticky, but it didn’t matter much and the unemployment rate fell from 3.9% to 3.7% as the participation rate improved slightly.
The stronger-than-expected jobs data sent the US 2-year yield to near 4.75% and the 10-year yield back to 4.28%, but stock traders reacted cheerfully to the news that the US labor market is softening, not collapsing. The latest data suggest that the Fed is one step closer to achieving its Goldilocks scenario: winning the battle against inflation without pushing the economy into recession. Is this too good to be true? This week’s inflation update and Fed decision will tell us.
The S&P500 closed at a ytd high on Friday and the Nasdaq closed just below its ytd high. The US Dollar Index rebounded from the previous day’s sell-off, which was largely driven by a notable jump in the Yen following Bank of Japan (BoJ) Governor Ueda’s admission last week that the BoJ’s negative interest rates will become harder to maintain from the end of the year. The USDJPY – which fell from above 147 to 142 in a single move – is now consolidating gains around the 145 level as traders speculate on whether the BoJ will end negative interest rates before the end of the year.
Elsewhere, gold slipped below $2000 per ounce, the EURUSD is consolidating near its 100 DMA, near the 1.0760 level, the Cable is losing field on the back of a broad-based USD rebound, testing the 1.25 level on the downside, while the AUDUSD is hovering around its 200 DMA. The pair is still in positive territory according to the Fibonacci retracement of the recent bounce, but is on the verge of sinking into the bearish consolidation zone, as is the case with the other major counterparts.
Keeping up with the central banks
The economic calendar is busy this week. The U.S. will release its latest CPI update on Tuesday, the Fed will announce its latest policy decision on Wednesday, and then the Swiss National Bank (SNB), the European Central Bank (ECB), and the Bank of England (BoE) will deliver their final decisions of the year on Thursday. All four major central banks are expected to hold rates steady at current levels, but we will be watching closely to see how they address the rate cut expectations that have been building since late October. Chances are that the accompanying statements will attempt to cool the doves.
Activity in the Fed funds futures market is pricing in a nearly 75% chance of a May rate cut and a 42% chance of a March rate cut. This is where the game will be played. Either a sufficiently dovish Fed will raise expectations of an earlier rate cut, or – more reasonably – Powell will reiterate that the fight against inflation is on the right track, but that rates will remain high for an extended period until the Fed is convinced that the inflation battle is won. If that’s the case, we could see the dollar extend its rally against its major counterparts and the major pairs slip into a bearish consolidation zone ahead of the holiday season.