USD Turns Higher As Markets Digest Friday’s Jobs Data Surprise

The US Dollar moved higher at the start of the week yesterday and is back in demand across the European open today. Friday’s jobs data has muddied the water for USD bulls. Surprise strength in jobs growth and wages growth suggests that inflation might not yet have peaked after-all. USD bears had been looking for weaker data ahead of the December FOMC, paving the way for a smaller hike in December and either a pause in early 2023 or a smaller hike still. However, on the back of Friday’s data there are now concerns that November inflation might not have continued to cool, meaning that the Fed might need to continue with rates hikes through early 2023 at least.

Key Factors for Today

• USD back in demand following labour data surprise
• Mixed action in equities as global yields turn higher again
• Risk FX weakens amidst USD strength – RBA hikes rates and signals more to come
• Metals and oil turn lower
• OPEC+ holds production steady despite Russia embargo concerns

Coming Up

• USD – Trade Balance
• EUR – ECOFIN Meetings
• GBP – Construction PMI

Mixed Action in Equities As Yields Rise

Equities markets mostly turned lower yesterday as global bond yields rose as traders digested Friday’s jobs data. While USD remains well off highs for now, risks of a fresh leg higher on any further data strength this week mean that the outlook for equities markets remains vulnerable to further downside. However, worth noting that the performance in stocks has not been uniform. While US stocks have suffered the most, Asian indices have been holding up with Nikkei noting a positive start to the week as did the Hang Seng, with local markets benefiting from a further easing of covid restrictions in China which is raising hopes that the government will soon abandon its zero covid policy.

Risk FX Weaker

In FX, the uptick in USD this week has flattened the recent strength we’d seen elsewhere in other currencies. Risk FX are suffering the most on Tuesday with NZD the weakest performer.

RBA Hikes Again & Signals More to Come

Overnight, the RBA hiked rates by a further 25bps at its December rates meeting, signalling a continued pivot away from the more aggressive tightening action seen earlier in the year. Looking ahead, the RBA warned that inflation is still too high and signalled that further hikes will be necessary, remining markets that monetary policy is not on a pre-sent course and is subject to change.

Metals & Oil Hit By Fresh USD Strength

In the metals and commodities space, both gold and silver turned sharply lower yesterday as a fresh uptick in USD diluted positive sentiment for metals. Both metals look vulnerable to further downside this week should USD continue higher. Crude oil turned lower yesterday also as a stronger USD hurt demand. OPEC+ decided to hold production levels steady when it met this week, despite concerns over the embargo on Russian oil and what that will mean for prices globally. However, some chatter around further potential production cuts means upside risks cannot be ruled out.