Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
Well-well, guys, things are getting complicated. NFP indeed has changed the technical picture, despite overall bearish performance earlier. Thus, our suggestion to use double Stop entry orders was able to bring some fruits. Anyway, the reaction, in general, seems reasonable because high inflation data stands side-by-side with weaker job numbers, which potentially makes a holding effect on Fed activity. This explains the first reaction, but it is a long way ahead still.
So, it didn't take long for speedbumps to appear as markets rev up for 2022. Rising U.S. Treasury yields, sparked by growing speculation the Federal Reserve could start its rate hike cycle as early as March have doused early enthusiasm, just as the U.S. earnings season is about to kick off. And unrest in Kazakhstan has put geopolitical risks back on the agenda, while China battles to keep its zero COVID strategy on track ahead of the Winter Olympics.
Market overview
Despite the rapid spread of the Omicron variant, investors have viewed it as unlikely to derail the global economy or more aggressive actions by central banks, with studies indicating lower hospitalization rates.
COVID-19 hospitalizations in the United States are poised to hit a new high as early as Friday, according to a Reuters tally, surpassing the record set in January of last year as the highly contagious Omicron variant fuels a surge in infections. The United States reported 662,000 new COVID-19 cases on Thursday, the fourth-highest daily U.S. total, just three days after a record of nearly 1 million cases was hit, according to the Reuters tally. U.S. COVID hospitalizations approached 123,000, appearing poised to top the record above 132,000, according to the tally. Deaths, a lagging indicator, remain fairly steady at about 1,400 a day, well below last year's peak.
In New York 42% of patients hospitalized with COVID-19 were in the incidental category, Governor Kathy Hochul told a briefing on Friday, a sign of how the data may not be giving the clearest picture of Omicron's impact in terms of severe disease. While hospitalizations continue to rise in New York, Hochul and other state officials expressed optimism that the worst of the Omicron wave could pass in the coming days.
The U.S. dollar jumped against risk-sensitive currencies including the Aussie and sterling on Thursday, as worries about faster policy tightening by the Federal Reserve dented market sentiment. Minutes from the Fed's December meeting released on Wednesday were considered to be more hawkish than expected, weighing on riskier assets and supporting the U.S. dollar and bond yields.
The meeting minutes showed Fed officials said that a "very tight" job market and unabated inflation might require the Fed to raise interest rates sooner than expected and begin reducing its overall asset holdings - a process dubbed quantitative tightening (QT).
The language showed the depth of the consensus that has emerged at the Fed in recent weeks over the need to move against high inflation - not just by raising borrowing costs but by acting with a second lever and reducing the central bank's holdings of Treasury bonds and mortgage-backed securities. The Fed has about $8.8 trillion on its balance sheet, much of it accumulated during the coronavirus pandemic to keep financial markets stable and hold down long-term interest rates.
Futures on the federal funds rate on Wednesday have priced in a roughly 80% chance of a quarter-percentage-point rate hike by the Federal Reserve at the March meeting following the release of the U.S. central bank's minutes of its last policy meeting. For the year, rate futures are implying about three rate increases in 2022. That, plus the prospect of the Fed reducing its presence in long-term bond markets, pushed the U.S. 10-year Treasury yield to its strongest level since April 2021.
Along with outlining their inflation concerns, officials said that even with the U.S. labor market more than 3 million jobs short of its pre-pandemic peak, the economy was closing in fast on what might be considered maximum employment, given the retirements and other departures from the job market that have been prompted by the health crisis.
Some participants also noted that it could be appropriate to begin reducing the size of the Fed's balance sheet relatively soon after beginning to raise the fed funds rate. The size of the Fed's balance sheet is estimated at $8.5 trillion.
St. Louis Fed President James Bullard said on Thursday the Fed could raise rates as soon as March and is in a "good position" to be even more aggressive against inflation, as needed.
Some analysts viewed prospects of a March rate hike though as too aggressive given the likely moderation in growth amid the surge in COVID-19 cases and a possible easing of inflation.
Earlier in the day, the ADP National Employment Report showed private U.S. payrolls surged last month by more than double what economists polled by Reuters had forecast.
The December meeting was held as coronavirus case counts had begun to climb due to the spread of the Omicron variant. Infections have exploded since then, and there has been no commentary from senior Fed officials yet to indicate whether the changing health situation has altered their views about appropriate monetary policy.
Fed Chair Jerome Powell will appear before the Senate Banking Committee next week for a hearing on his nomination for a second four-year term as head of the central bank and is likely to update his views about the economy at that time.
Germany's 10-year bond yield lurched closer to positive territory on Thursday, just as borrowing costs across the euro area hit new highs in the face of a hawkish tone from the U.S. Federal Reserve and fresh signs of high German inflation.
Money market futures dated to the European Central Bank's October meeting showed a 10 bps rate hike was almost fully priced in. They also price in 15 bps worth of tightening by December, versus around 13 bps on Wednesday. Inflation numbers from European powerhouse economy Germany added to the bearish mood in bond markets.
Elsa Lignos, head of FX strategy at RBC Capital Markets said that while rate hike expectations for 2022 have propped up the dollar, the possibility of more rate hikes for 2023 could provide further strength to the currency.
US DOLLAR FORECAST
Most currencies will struggle to make any gains against the U.S. dollar in the coming months, as monetary tightening expected from the Federal Reserve will provide the greenback with enough impetus to extend its dominance well into 2022, analysts said. Nearly two-thirds of 49 foreign exchange strategists polled by Reuters between Jan. 4-6 said interest rate differentials would dictate sentiment in major FX markets in the near term, with only two concerned about new coronavirus variants.
Median forecasts lined up with that view as analysts do not expect most major and emerging currencies to make any significant headway against the greenback during that period.
Among the emerging currencies polled on, the tightly-controlled Chinese yuan was predicted to depreciate nearly 2% to 6.5 per dollar in a year. The euro , which lost nearly 7% last year was forecast to gain a little under 1.5% by end 2022.
Jason Draho, head, Asset Allocation Americas, at UBS Global Wealth Management, advised people to brace for alarm around economic data, lower returns, and more volatility, especially as any Omicron-linked distortions have yet to emerge.
This unease about when the COVID coast will clear and what equilibrium might emerge is widespread.
And that's before you get to domestic issues - Brexit in the UK, French and Italian presidential elections, U.S. midterms, China's "common prosperity" push and property sector woes, and the energy price impact of Russia's standoff with some neighbors.
The dollar index weakened after the Labor Department said nonfarm payrolls rose by 199,000 last month, well short of the 400,000 estimates. But analysts noted underlying data in the report appeared sturdier, with the unemployment rate falling to 3.9% against expectations of 4.1% while earnings rose by 0.6%.
Nonfarm payrolls rose by 199,000 jobs last month, the survey of establishments showed. Data for November was revised up to show payrolls advancing by 249,000 jobs instead of the previously reported 210,000.
The underwhelming job growth in December likely reflects labor shortages as well as anomalies with the so-called seasonal adjustment, the model used by the government to strip out seasonal fluctuations from the data. December is typically a weak month for payrolls growth. Unadjusted payrolls increased by 72,000. The seasonal factor added 127,000 jobs to the December tally, less than the 213,000 added in December 2020 and fewer than the roughly 425,000 average prior to the pandemic.
Employment was unlikely to have been impacted by surging infections driven by the Omicron variant of COVID-19. The government surveyed businesses and households for last month's report in mid-December just as Omicron was barreling across the country. The variant's hit to payrolls could be felt in January.
The difficulties that remain in the job market, Fed officials said in their discussions, now have less to do with monetary policy and more to do with ongoing disruptions from COVID-19 - factors like school reopenings, child care, and health conditions - that it cannot influence. Workers may wait longer to take jobs again, they acknowledged, than had been expected.
Left unsaid was the fact that through December, some 2.8 million fewer people were employed than in February of 2020, just before the pandemic, as measured by the Labor Department's monthly survey of households, a gap Fed Chair Jerome Powell had all but promised would be erased. And the shortfalls are disproportionate among women and the less educated, gaps that the December jobs report did little to close.
The Fed's heightened emphasis on jobs, adopted in August of 2020, was crafted at a moment when inflation was nonexistent - and had been for most of the previous decade. Officials were convinced, at that point, that the central bank had erred in the past by not encouraging more job growth and instead had raised interest rates even without clear inflation risk. The Fed was determined not to make that mistake again. But when inflation took off last year it became a potential constraint on the central bank's ability to let the economy run unfettered.
Keeping prices under control is a core Fed objective. Now, even at the risk of slowing economic growth and hiring, the central bank feels it needs to be ready to tighten financial conditions or risk a worse and more persistent outbreak of price increases, an outcome that could prove equally harmful to the lower-income households disproportionately affected by pandemic-related job losses.
Just as the surge in inflation surprised the Fed, so did the behavior of workers, who have not flocked into the record number of open positions at the pace expected.
Despite the weak job creation last month, wages surged and the unemployment rate fell below the 4% level that Fed officials feel is sustainable, and even further below the 4.3% rate policymakers expected by the end of 2021.
Next week to watch
In addition to NFP this week, next week we're watching for inflation data by CPI and PPI reports and Retail Sales that should provide a more or less clear picture of the current economic condition and how these numbers impact interest rates level. Also keep an eye on J. Powell's re-appointment hearing in Senate on Tue, 11.
The first week of trading in 2022 has been anything but dull for the world's biggest bond markets. Short-dated Treasury yields shot up to highs not seen since early 2020, 10-year yields are up over 20 bps, Germany's -0.06% Bund yield is lurching closer to 0% and sovereign borrowing costs from Britain to Australia are at multi-month highs.
The message is clear: tighter monetary policy is likely sooner than anticipated, with the United States leading the way. Until data or central bank speak contradicts this, 10-year Treasury yields could reach the 2% milestone soon.
Investors will also keep a close on real yields since a view that inflation-adjusted yields will remain low has fueled the risk asset rally. The first week's 30 bps jump in U.S. real yields, may not make for a happy new year for some.
So, the in-depth view shows that NFP data is not weak enough to change Fed plans on the policy. The major consensus right now stands for the 1st rate change in March. The report was not bad per se, as employment is just losing the pace a bit but stands positive. This is understandable in December when people as a rule postpone the job searching for the next year while employees very often tell the searchers to come "after the Holidays". Thus, less than expected Dec numbers with minor upside revision of Nov ones seem like logic and a not bad result. Especially when it is accompanied by higher wages growth and a lower unemployment rate. This makes us think that the "Fed way" is still intact. If we get higher CPI/PPI data next week and more or less positive Retail Sales - this just supports this view. Although on Mon-Wed, until we get PPI numbers EUR could climb higher on the rest of Friday's momentum.
In a longer-term view, we somehow still believe that the US needs to resolve its global geopolitical targets that they try to do using pandemic situations. And the major target in the economic sphere is to down China's growth, putting it down as a major economic rival. We suggest that so-called supply bottlenecks are not an occasional product of pandemics but the well-planned strategy that brings the first fruits. We take a look at this topic in detail tomorrow in our Gold market report as it better relates to it.
Here we just tell that the current stage of geopolitical struggle stands at halfway and it is too early to close it. This means that pandemics should last at least for 1-2 years more. As it has a direct relation to the inflation level, it makes us doubt the theory that inflation should normalize and start dropping in the nearest 3-6 months. We suggest that despite Fed efforts, inflation hardly starts moving down until the rate exceeds the 2%+ level. Even when this will happen, we do not expect inflation to fall sharply but remains at high levels within moderate time. Since pandemic makes double hurt to EU and the EUR - first is because of weaker ECB policy, second is by contracting economy recovery, we suggest that the US Dollar strength will last longer than it is suggested right now.
Well-well, guys, things are getting complicated. NFP indeed has changed the technical picture, despite overall bearish performance earlier. Thus, our suggestion to use double Stop entry orders was able to bring some fruits. Anyway, the reaction, in general, seems reasonable because high inflation data stands side-by-side with weaker job numbers, which potentially makes a holding effect on Fed activity. This explains the first reaction, but it is a long way ahead still.
So, it didn't take long for speedbumps to appear as markets rev up for 2022. Rising U.S. Treasury yields, sparked by growing speculation the Federal Reserve could start its rate hike cycle as early as March have doused early enthusiasm, just as the U.S. earnings season is about to kick off. And unrest in Kazakhstan has put geopolitical risks back on the agenda, while China battles to keep its zero COVID strategy on track ahead of the Winter Olympics.
Market overview
Despite the rapid spread of the Omicron variant, investors have viewed it as unlikely to derail the global economy or more aggressive actions by central banks, with studies indicating lower hospitalization rates.
COVID-19 hospitalizations in the United States are poised to hit a new high as early as Friday, according to a Reuters tally, surpassing the record set in January of last year as the highly contagious Omicron variant fuels a surge in infections. The United States reported 662,000 new COVID-19 cases on Thursday, the fourth-highest daily U.S. total, just three days after a record of nearly 1 million cases was hit, according to the Reuters tally. U.S. COVID hospitalizations approached 123,000, appearing poised to top the record above 132,000, according to the tally. Deaths, a lagging indicator, remain fairly steady at about 1,400 a day, well below last year's peak.
"It's sort of like medical throughput gridlock," Dr. Peter Dillon, the chief clinical officer at Penn State Health in Pennsylvania, said in an interview. "There (are) so many forces now contributing to the challenges and I think there's an element, I don't want to say despair, but of fatigue."
In New York 42% of patients hospitalized with COVID-19 were in the incidental category, Governor Kathy Hochul told a briefing on Friday, a sign of how the data may not be giving the clearest picture of Omicron's impact in terms of severe disease. While hospitalizations continue to rise in New York, Hochul and other state officials expressed optimism that the worst of the Omicron wave could pass in the coming days.
"We need a couple more days to be able to tell that it has peaked," said Dr. Mary Bassett, New York's acting Health Commissioner. "I think that we can expect a difficult January but that things should be much better by February."
The U.S. dollar jumped against risk-sensitive currencies including the Aussie and sterling on Thursday, as worries about faster policy tightening by the Federal Reserve dented market sentiment. Minutes from the Fed's December meeting released on Wednesday were considered to be more hawkish than expected, weighing on riskier assets and supporting the U.S. dollar and bond yields.
The meeting minutes showed Fed officials said that a "very tight" job market and unabated inflation might require the Fed to raise interest rates sooner than expected and begin reducing its overall asset holdings - a process dubbed quantitative tightening (QT).
"Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate," the minutes stated.
The language showed the depth of the consensus that has emerged at the Fed in recent weeks over the need to move against high inflation - not just by raising borrowing costs but by acting with a second lever and reducing the central bank's holdings of Treasury bonds and mortgage-backed securities. The Fed has about $8.8 trillion on its balance sheet, much of it accumulated during the coronavirus pandemic to keep financial markets stable and hold down long-term interest rates.
Futures on the federal funds rate on Wednesday have priced in a roughly 80% chance of a quarter-percentage-point rate hike by the Federal Reserve at the March meeting following the release of the U.S. central bank's minutes of its last policy meeting. For the year, rate futures are implying about three rate increases in 2022. That, plus the prospect of the Fed reducing its presence in long-term bond markets, pushed the U.S. 10-year Treasury yield to its strongest level since April 2021.
Along with outlining their inflation concerns, officials said that even with the U.S. labor market more than 3 million jobs short of its pre-pandemic peak, the economy was closing in fast on what might be considered maximum employment, given the retirements and other departures from the job market that have been prompted by the health crisis.
"Participants pointed to a number of signs that the U.S. labor market was very tight, including near-record rates of quits and job vacancies, as well as a notable pickup in wage growth," the minutes said. "Many participants judged that, if the current pace of improvement continued, labor markets would fast approach maximum employment."
Some participants also noted that it could be appropriate to begin reducing the size of the Fed's balance sheet relatively soon after beginning to raise the fed funds rate. The size of the Fed's balance sheet is estimated at $8.5 trillion.
St. Louis Fed President James Bullard said on Thursday the Fed could raise rates as soon as March and is in a "good position" to be even more aggressive against inflation, as needed.
"The tone of the minutes suggested that they're going to start earlier and could extend the tightening. They are very afraid of inflation getting out of hand," said Kim Rupert, managing director, fixed income, at Action Economics. Looking to shrink the balance sheet more quickly than we thought, that might limit the extent of rate hikes and I think the Fed even sort of mentioned that."
Some analysts viewed prospects of a March rate hike though as too aggressive given the likely moderation in growth amid the surge in COVID-19 cases and a possible easing of inflation.
"March is definitely aggressive, but the market is ahead of the Fed. I would say it's more May or June," said Ellis Phifer, managing director, fixed income research at Raymond James. If you get data showing pricing pressures and delivery times are easing, I would imagine that would push rate hikes back a little bit...I think we are near peak inflation for the year.
Earlier in the day, the ADP National Employment Report showed private U.S. payrolls surged last month by more than double what economists polled by Reuters had forecast.
"Trend and momentum dynamics continue to favour the USD, but prices will have to pierce the Q4 2021 highs in order to reassert the uptrends in most cases," particularly against the euro, sterling and Australian dollar, George Davis, a strategist at RBC, wrote in a report.
The December meeting was held as coronavirus case counts had begun to climb due to the spread of the Omicron variant. Infections have exploded since then, and there has been no commentary from senior Fed officials yet to indicate whether the changing health situation has altered their views about appropriate monetary policy.
Fed Chair Jerome Powell will appear before the Senate Banking Committee next week for a hearing on his nomination for a second four-year term as head of the central bank and is likely to update his views about the economy at that time.
Germany's 10-year bond yield lurched closer to positive territory on Thursday, just as borrowing costs across the euro area hit new highs in the face of a hawkish tone from the U.S. Federal Reserve and fresh signs of high German inflation.
"The discussion about quantitative tightening in the minutes is very significant," said ING senior rates strategist Antoine Bouvet. First and foremost, it shows the magnitude of the Fed’s change of tone as they contemplate a more aggressive balance sheet reduction in parallel to hikes."
Money market futures dated to the European Central Bank's October meeting showed a 10 bps rate hike was almost fully priced in. They also price in 15 bps worth of tightening by December, versus around 13 bps on Wednesday. Inflation numbers from European powerhouse economy Germany added to the bearish mood in bond markets.
"There is still a sense that (euro area) inflation could surprise to the upside for longer than expected, so markets have to position for the view that the ECB could capitulate and move earlier on rates," said Mizuho rates strategist Peter McCallum. We think inflation will peak but that could come later in Q1."
Elsa Lignos, head of FX strategy at RBC Capital Markets said that while rate hike expectations for 2022 have propped up the dollar, the possibility of more rate hikes for 2023 could provide further strength to the currency.
"The consensus narrative seems to be the Fed will ‘overtighten’ in 2022 and be forced into slowing down materially in 2023", she wrote in a note. "We think it’s a repricing higher for 2023 which has the most potential to boost USD this year – and we are watching this as a key driver for the dollar", she added.
"Some people are quite spooked by the minutes from the Fed that they could be tightening faster," said Carlos de Sousa, an emerging markets strategist and portfolio manager at Vontobel Asset Management. Maybe the market is overreacting a bit, though. The fact they are discussing this (quantitative tightening) doesn't mean they are going to do it," he said, adding that he expected 1-3 rate hikes in 2022 but would be surprised if QT did happen this year.
"There is a risk that the Fed might fall into the trap of making policy errors because they do have to perhaps hike interest rates faster than expected, but given the timing of their exit from quantitative easing, it could coincide with a slowdown in the economic cycle and also a decline in inflation on base effects," said Casanova.
US DOLLAR FORECAST
Analysts view 96.40 for the dollar index as a technical resistance point, with a break above likely to result in a test of the December high of 96.91. Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC in New York, anticipated the appreciation in the dollar index will continue into early 2022 toward the 98 level, with an "overshoot" to 100 possible.
Most currencies will struggle to make any gains against the U.S. dollar in the coming months, as monetary tightening expected from the Federal Reserve will provide the greenback with enough impetus to extend its dominance well into 2022, analysts said. Nearly two-thirds of 49 foreign exchange strategists polled by Reuters between Jan. 4-6 said interest rate differentials would dictate sentiment in major FX markets in the near term, with only two concerned about new coronavirus variants.
"There's been a lot of U.S. dollar strength of late, mainly driven by the widening interest rate differentials and inflation dynamics in the U.S. relative to other major markets like Japan and Europe," said Kerry Craig, global market strategist at JP Morgan Asset Management. The fact the Fed is becoming much more hawkish and reacting to that by tapering much sooner than forecast a few months ago ... (and soon) start raising rates should support the dollar over the first part of the year," he said.
Median forecasts lined up with that view as analysts do not expect most major and emerging currencies to make any significant headway against the greenback during that period.
Among the emerging currencies polled on, the tightly-controlled Chinese yuan was predicted to depreciate nearly 2% to 6.5 per dollar in a year. The euro , which lost nearly 7% last year was forecast to gain a little under 1.5% by end 2022.
Jason Draho, head, Asset Allocation Americas, at UBS Global Wealth Management, advised people to brace for alarm around economic data, lower returns, and more volatility, especially as any Omicron-linked distortions have yet to emerge.
"The market may not look through this economic noise, but that's what it is," he said, adding that growth and inflation figures are likely to get worse in the first two months. There are multiple plausible paths that the economy could take over the next 12 months, and the right investment playbook can vary quite extensively between them."
This unease about when the COVID coast will clear and what equilibrium might emerge is widespread.
"A unique confluence of events – the restart, new virus strains, supply-driven inflation, and new central bank frameworks – are creating confusion as there are no historical parallels," wrote BlackRock strategists. The unusually wide range of outcomes means they claim they have "trimmed" risk-taking.
And that's before you get to domestic issues - Brexit in the UK, French and Italian presidential elections, U.S. midterms, China's "common prosperity" push and property sector woes, and the energy price impact of Russia's standoff with some neighbors.
"We are certainly not at a new normal ... we need to put Brexit behind us," City of London policy chief Catherine McGuinness said this week, adding that the pandemic was masking the impact on Britain's finance industry of leaving the European Union.
The dollar index weakened after the Labor Department said nonfarm payrolls rose by 199,000 last month, well short of the 400,000 estimates. But analysts noted underlying data in the report appeared sturdier, with the unemployment rate falling to 3.9% against expectations of 4.1% while earnings rose by 0.6%.
"The U.S. labor market may have lost a little momentum at the end of a stellar year, largely due to the lack of available workers rather than available positions, but it is holding up nicely, at least so far," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
Nonfarm payrolls rose by 199,000 jobs last month, the survey of establishments showed. Data for November was revised up to show payrolls advancing by 249,000 jobs instead of the previously reported 210,000.
"Most Fed officials will conclude that full employment has been reached, and we now expect liftoff in March and four hikes in 2022," said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.
The underwhelming job growth in December likely reflects labor shortages as well as anomalies with the so-called seasonal adjustment, the model used by the government to strip out seasonal fluctuations from the data. December is typically a weak month for payrolls growth. Unadjusted payrolls increased by 72,000. The seasonal factor added 127,000 jobs to the December tally, less than the 213,000 added in December 2020 and fewer than the roughly 425,000 average prior to the pandemic.
Employment was unlikely to have been impacted by surging infections driven by the Omicron variant of COVID-19. The government surveyed businesses and households for last month's report in mid-December just as Omicron was barreling across the country. The variant's hit to payrolls could be felt in January.
"All those places that are very important for economic growth continue to grow so that is fantastic," said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago. So the top line number is a miss, the underneath stuff all seems to be doing good, albeit not at the pace we would like to see it."
"While the headline might have fallen short of the consensus, the consensus doesn't matter much to the Fed. For them, this probably justifies their hawkish tilt," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. We'll have to see how whether they walk the walk of their hawkish talk, but the odds are rising for a rate hike in March or May and a balance sheet run-off beginning later next year."
The difficulties that remain in the job market, Fed officials said in their discussions, now have less to do with monetary policy and more to do with ongoing disruptions from COVID-19 - factors like school reopenings, child care, and health conditions - that it cannot influence. Workers may wait longer to take jobs again, they acknowledged, than had been expected.
Left unsaid was the fact that through December, some 2.8 million fewer people were employed than in February of 2020, just before the pandemic, as measured by the Labor Department's monthly survey of households, a gap Fed Chair Jerome Powell had all but promised would be erased. And the shortfalls are disproportionate among women and the less educated, gaps that the December jobs report did little to close.
The Fed's heightened emphasis on jobs, adopted in August of 2020, was crafted at a moment when inflation was nonexistent - and had been for most of the previous decade. Officials were convinced, at that point, that the central bank had erred in the past by not encouraging more job growth and instead had raised interest rates even without clear inflation risk. The Fed was determined not to make that mistake again. But when inflation took off last year it became a potential constraint on the central bank's ability to let the economy run unfettered.
Keeping prices under control is a core Fed objective. Now, even at the risk of slowing economic growth and hiring, the central bank feels it needs to be ready to tighten financial conditions or risk a worse and more persistent outbreak of price increases, an outcome that could prove equally harmful to the lower-income households disproportionately affected by pandemic-related job losses.
Just as the surge in inflation surprised the Fed, so did the behavior of workers, who have not flocked into the record number of open positions at the pace expected.
Despite the weak job creation last month, wages surged and the unemployment rate fell below the 4% level that Fed officials feel is sustainable, and even further below the 4.3% rate policymakers expected by the end of 2021.
"There is nothing here to dissuade the Fed from raising rates in March" and trimming its balance sheet soon after, wrote Karim Basta, chief economist for III Capital Management.
Next week to watch
In addition to NFP this week, next week we're watching for inflation data by CPI and PPI reports and Retail Sales that should provide a more or less clear picture of the current economic condition and how these numbers impact interest rates level. Also keep an eye on J. Powell's re-appointment hearing in Senate on Tue, 11.
The first week of trading in 2022 has been anything but dull for the world's biggest bond markets. Short-dated Treasury yields shot up to highs not seen since early 2020, 10-year yields are up over 20 bps, Germany's -0.06% Bund yield is lurching closer to 0% and sovereign borrowing costs from Britain to Australia are at multi-month highs.
The message is clear: tighter monetary policy is likely sooner than anticipated, with the United States leading the way. Until data or central bank speak contradicts this, 10-year Treasury yields could reach the 2% milestone soon.
Investors will also keep a close on real yields since a view that inflation-adjusted yields will remain low has fueled the risk asset rally. The first week's 30 bps jump in U.S. real yields, may not make for a happy new year for some.
So, the in-depth view shows that NFP data is not weak enough to change Fed plans on the policy. The major consensus right now stands for the 1st rate change in March. The report was not bad per se, as employment is just losing the pace a bit but stands positive. This is understandable in December when people as a rule postpone the job searching for the next year while employees very often tell the searchers to come "after the Holidays". Thus, less than expected Dec numbers with minor upside revision of Nov ones seem like logic and a not bad result. Especially when it is accompanied by higher wages growth and a lower unemployment rate. This makes us think that the "Fed way" is still intact. If we get higher CPI/PPI data next week and more or less positive Retail Sales - this just supports this view. Although on Mon-Wed, until we get PPI numbers EUR could climb higher on the rest of Friday's momentum.
In a longer-term view, we somehow still believe that the US needs to resolve its global geopolitical targets that they try to do using pandemic situations. And the major target in the economic sphere is to down China's growth, putting it down as a major economic rival. We suggest that so-called supply bottlenecks are not an occasional product of pandemics but the well-planned strategy that brings the first fruits. We take a look at this topic in detail tomorrow in our Gold market report as it better relates to it.
Here we just tell that the current stage of geopolitical struggle stands at halfway and it is too early to close it. This means that pandemics should last at least for 1-2 years more. As it has a direct relation to the inflation level, it makes us doubt the theory that inflation should normalize and start dropping in the nearest 3-6 months. We suggest that despite Fed efforts, inflation hardly starts moving down until the rate exceeds the 2%+ level. Even when this will happen, we do not expect inflation to fall sharply but remains at high levels within moderate time. Since pandemic makes double hurt to EU and the EUR - first is because of weaker ECB policy, second is by contracting economy recovery, we suggest that the US Dollar strength will last longer than it is suggested right now.