Market mood turned sour in the US trading yesterday, and the latest data showed that 4.5 million Americans quit their jobs in November. 4.5 million is a lot of job departures, but there is nothing the Federal Reserve (Fed) could do about it, as the root cause of the problem is not the lack of job openings, on the contrary, the JOLTS data shows that there are about 10 million job openings in the US right now, but people are not willing to take them. In this respect, keeping the interest rates low wouldn’t encourage people to get back to work.
So, the great resignation continues being a headache for the policymakers, but in the meantime the jobs data is losing of its importance, as, again, the Fed can’t do much about people not taking the available jobs. And more importantly, it must deal with the rising inflation now.
Today’s ADP data is expected to reveal that the US economy added 400’000 private jobs in December. That would be less than a tenth of what has been lost in November. So the question is, does the jobs data even matter anymore?
US equity indices retreated yesterday, and yesterday’s price action is mostly driven by higher interest rate expectations, as Nasdaq – the most interest-rate sensitive of the three US indices took the biggest hit with a 1.33% drop, the S&P500 was almost flat, and the Dow, the less sensitive of the US indices to the interest rates, eked out a 0.60% advance.
The US 2-year yield hit the 0.80%, the highest level in almost two years, but remains way lower than the pre-pandemic times. In 2018 for example, when the Fed was normalizing policy, it had advanced close to the 3% level, so there is way more to price in on this end. And the US 10-year yield is again flirting with the 1.70% mark.
The rising yields will be a major story of the coming months of course as the Fed is preparing to end its QE purchases and hike rates. And the Fed minutes should give some light on the Fed’s plans at today’s release. The December dot plot hinted at three 25bp rate hikes throughout this year, while the Fed could push for at least a 100bp total hike in 2022 to fight the rising inflation.
In the forex, the US dollar remains strong, and that strength is pushing the EURUSD below the 1.13 mark. The sterling bulls, however, defend well their territory against a broadly stronger US dollar and a push above the 100-DMA, near the 1.3560 mark, should throw a basis to a medium term bullish reversal in Cable.
In cryptocurrencies, appetite in Bitcoin remains contained near the 200-dma and the coin is testing the low end of the December horizontal channel base, which is near $45K level. One explanation for the lack of appetite is the rising US yields, which are applying a visible downside pressure on the pricing of cryptocurrencies. The latter hints that this alternative asset class may not be immune to the rising interest rates and a tighter monetary policy environment globally. If that’s the case, we could see the downside pressure building stronger in the medium run, and cause a bit more bleeding as the Fed walks towards concrete tightening.
Finally, gold is now trading above both its 50, 100 and 200-DMA, but the positive attempt to the $1830 level remained short-lived. It will be interesting to see how the rising US yields, which increases the opportunity cost of holding the non-interest-bearing gold, will play out in the coming months for gold investors, as yes the US yields will certainly continue rising, but they remain very low compared to the historical means. In this respect, the force with which the risk assets will react to the rising yields will be an important factor for the gold’s medium-term direction. If we see meaningful outflows from the risk assets as a result of tighter monetary policies and rising yields, we could then see investors piling back into gold regardless of the rising yields.
