Market sentiment is mixed following the unnerving jobs data revealed in the US last Friday. Much lower-than-expected NFP print, and higher wages has been an explosive cocktail for the Federal Reserve (Fed) hawks, as not only the soft NFP data couldn’t get the Fed doves moving, but the improved unemployment rate and the rising wages boosted the Fed hawks. There is now a stronger case for the first rate hike to happen as early as in March in the US.
The US 2-year yield hit the 0.90% mark, and the US 10-year yield advanced to 1.80%.
So, the first week of 2022 hasn’t been as glorious as the first trading hours suggested it would be. The S&P500 made its worst start to the year since 2016, and Nasdaq got smashed by 4.5%. The sentiment of uncertainty could well continue into Wednesday’s US inflation data, which may reveal a further advance to the 7% mark in December, from 6.8% printed a month earlier. The persistent rise in consumer inflation could further boost the Fed hawks, bring them to price a steeper normalization path, and more importantly fuel the expectation that the Fed should rapidly reduce the size of its balance sheet to avoid flattening the yield curve while fighting back inflation. As a result, there is plenty of hawkishness yet to be priced in the asset prices, and that could cause a bit more selling across the markets this week, especially in growth stocks which should feel the pinch of higher interest rates compared with the value names.
There is one hope though: the latest earnings season will kick off this week, and higher rate prospects have certainly not interfered with the corporate performances just yet. Therefore, strong corporate results could reverse the Fed-induced moodiness, and help improve investor appetite, at least on the index level.
European inflation is high and sticky, as well
High inflation is shaping the Fed expectations for 2022, but the same is oddly not true for Europe. The data released on Friday revealed that inflation in Europe hit the 5% mark, versus a slight retreat to 4.7% penciled in by analysts. Higher energy and food prices were mostly responsible for the rising inflation and the headline figure is now well above the ECB’s 2% target. Inflation in Europe is becoming a big sticky problem as well, but the European officials prefer turning a blind eye on the problem. So normally, such inflation read should’ve fed into a stronger euro appetite long ago, but Lagarde’s stubbornness is holding back the ECB hawks, and the euro bulls contained for now. For how long?
Oil
Kazakhstan is now moving towards suppressing the rebellion in the country helped by Russians. China said it would help restoring order if needed as well. Crude oil kicks off the week on a flat-to-negative note. Appetite above $80pb hasn’t been strong, but any price pullback is expected to meet a strong support as the OPEC production remains below target due to supply constraints in many oil producer countries, and that spare capacity is set to soften the bears’ hands in the short, medium run. Solid support is seen near the $75pb, 50 and 100-DMA.
