Despite yesterday’s sharp sell-off, European markets are still very much in positive territory for the first trading week of 2022, unlike US markets which have had a much rougher ride due to a sharp sell-off in the US bond market, amid rising rate hike and balance sheet roll-off expectations after this week's minutes from the US Federal Reserve.
US markets almost managed to eke out a gain yesterday, before rolling over in the last half-an-hour of trading to finish lower for the third day in a row, in another choppy day for the likes of the Nasdaq and S&P 500, as investor attention turns towards today’s US non-farm payrolls report for December.
November’s payrolls report turned out to be a rather lacklustre affair, however it was still good enough for the Federal Reserve to accelerate the winding back of its taper programme, even though the headline number was disappointing, coming in at 210,000 jobs, against an expectation of 550,000. The unemployment rate on the other hand was much more encouraging, falling back to 4.2%, from 4.6%, and the participation rate rose to 61.8%, as more people returned to the workforce. Wage growth was also encouraging from an inflation point of view, remaining unchanged at 4.8%.
One of the main reasons for the weak headline number in November was weak payrolls growth in leisure and hospitality, while away from that, the household survey saw strong gains, with vacancy rates still very high, although as we look towards today’s payrolls report, we should also be prepared to see a substantial upward revision.
With Omicron spreading across the US like wildfire in December, and weekly jobless claims starting to edge higher from their lowest levels in 1969, there is a risk that this week’s report could similarly disappoint, although given how strong this weeks ADP report turned out to be, today’s number is a difficult call. It ought to be a good number given that continuing claims have fallen back to the levels they were pre-pandemic at around 1.7m in recent weeks, while the employment component in the manufacturing ISM this week was decent.
This is particularly puzzling given that the US is millions of workers below its pre-pandemic levels as seen by recent JOLTS data, and the low participation rate.
This week’s ISM reports also painted a mixed picture in respect of the employment components, so it will be interesting to see whether the weakness we saw in leisure and hospitality that we saw in November, sees a recovery in December.
Expectations are for December payrolls to improve to 420,000, and the unemployment rate to fall further to 4.1%, although some estimates for payrolls have come in as high as 900m. It will certainly need to see a decent number to help push the US dollar up from current levels, and don’t forget to keep an eye out for an upward November revision.
Ultimately, today’s number is unlikely to make that much difference to how investors view the potential timing of the first US rate rise, with the most attention likely to be on the average hourly earnings numbers which are expected to fall back from 4.8% to 4.2%. This big drop is likely to be as a result of large-scale temporary hiring in the leadup to Thanksgiving and the Christmas period.
Away from US payrolls, yesterday saw German inflation hit its highest levels since 1992, at 5.3%, a number that is expected to trickle into today’s preliminary EU CPI numbers for December. This is expected to come in at 4.8%, with core prices set to come in at 2.5%, a slight fall from levels in November.
EUR/USD – still below resistance at the 1.1385 area and the December peaks. The bias remains towards the downside and towards the November 2021 lows at 1.1185. The main support remains at the June 2020 lows at 1.1160. A move through 1.1420 argues for a move back to the 1.1520 level.
GBP/USD – having recovered towards the 1.3600 area we have trend line resistance just above here from last year’s peak at 1.4250. To break the downside momentum, we need to break this trend line. Support now comes in at 1.3420 and last week’s lows.
EUR/GBP – broken below the November lows at 0.8450 with the risk we now head towards the 0.8280 area and the lows in 2020. Resistance comes in at the 0.8380 level and behind that at 0.8450.
USD/JPY – now above the 114.80 area we look set for a move towards the December 2016 highs at 118.60. Any pullbacks need to hold above 114.80 after the New Year surge saw us move through the 116.00 area.
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