Market Briefing: Markets Slip After Climbing a Wall of Worry
Markets look set to give back some of their gains in today’s session, entering a modest correction after a week in which investors broadly ignored hawkish central bank warnings, bidding up risk-sensitive assets across the board. Treasury yields and the dollar are edging higher, while major equity indices are setting up for a slightly weaker open. The Australian and Canadian dollar are under pressure, while the pound and euro are gaining ground after yesterday’s selloff.
Global bond yields tumbled earlier in the week as the Bank of England, European Central Bank, and Federal Reserve each avoided pushing back against the wholesale loosening in financial conditions that has taken place since October. Investors are increasingly convinced inflation will drop sharply in coming months, that economies will slow sufficiently to prompt a new round of rate cuts, and that significant damage to market valuations will somehow be avoided. We think this could be dangerous, but we also note that Scott Fitzgerald once said: "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function”. Markets may be exhibiting a hitherto-unknown form of genius.
Economists think the US added 189,000 new jobs in January, down from 223,000 in December, but still remarkably strong. The unemployment rate is seen climbing to 3.6 percent from 3.5 in the prior month, and average hourly earnings may have risen 0.3 percent for a second month.
Signs of a sharp deterioration in labour market conditions could trigger a repricing in Treasury yields and force the dollar lower, but more modest deviations from these expectations are unlikely to rock markets. Although non-farm payrolls reports will eventually regain their importance as the most critical events on the economic calendar, inflation prints tend to have a more meaningful impact on monetary policy expectations at the moment.
The Institute for Supply Management's services index is thought to have hit 50.6 in January, pulling out of contractionary territory as spirits brightened and consumer spending patterns continued to shift back toward intangible products.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Non-Farm Payrolls, January
USD Baker Hughes Weekly Rig Count