Dollar extends gains post payrolls

Friday’s stronger than expected US jobs (payrolls) report for December saw the market pare back already battered down expectations for further Fed rate cuts, with another 25bps reduction now not fully priced until the final quarter of the year. This contributed to a jump in bond yields (led by short-maturity yields) and a further strengthening of the dollar, while equity markets sold off. The euro and sterling fell to lows for the week of $1.0215 and $1.2195 against the dollar following the payrolls data, with the single currency trading at $1.0230 this morning and the pound down to around $1.2165. EURGBP was little changed on Friday, but gained around a penny on the week, and is a touch firmer at the start of play today trading just north of £0.84.  Looking at the week ahead, most attention will be on US CPI inflation data for December due on Wednesday.

In the bond markets, US  2-yields jumped by 11bps on Friday and 10-year yields rose by 7bps (to 4.76%, narrowly breaching last year’s high of 4.75%), while equivalent German yields increased by 5bps and 3bps respectively. In what was a torrid week for UK bonds, 2- and 10-year yields rose by around 2-3bps, the latter finishing up 25bps from the previous Friday’s close. Meanwhile in equity markets, the S&P 500 shed around 1.5% and European stocks were down almost 1%; the former is now ahead by just 0.8% since the US presidential election in early November, having gained around 5% in the first month or so following Trump’s victory.

The US economy added 256k jobs in December, well ahead of the consensus forecast for a gain of 165k, and the unemployment rate dipped to 4.1% rather than holding steady at 4.2% as expected, though the annual rate of growth in hourly earnings came in a touch lower than forecast at 3.9%, (down from 4% in November and 4.3% in the twelve months to December 2023).  Separately, consumers short- and medium/long-term inflation expectations rose this month according to the latest University of Michigan survey, to 3.3% for both from 2.8% and 3% in December.

In comments following Friday’s jobs report, Fed member Goolsbee said the data suggest the labour market “is stabilizing at something like full employment and (is not) overheating,” adding that he still expects interest rates to be a “fair bit lower” over the next 12 to 18 months as long as inflation doesn’t move higher.

For the week ahead, as well as Wednesday’s CPI inflation report, other US data due include producer prices on Tuesday and retail sales and industrial production on Thursday and Friday respectively. Elsewhere, there are important releases scheduled in the UK with CPI inflation and producer prices on Wednesday, GDP on Thursday and retail sales on Friday, while Euro area industrial production is scheduled for Wednesday. The IMF publishes its World Economic Outlook Update on Friday, while a number of Fed, ECB and Bank of England members are due to speak over the course of the week.