Daily Market Comment – Strong jobs report can’t lift dollar, but equities shoot up

  • Dollar unable to capitalize on solid US employment report
  • But stock markets push higher, powered by decline in yields
  • Gold shines as well, focus now turns to litany of Fed speakers
Strong NFP not enough to boost dollar

The US employment report for October was pretty solid. Nonfarm payrolls overcame forecasts, the previous month’s number was revised higher, the unemployment rate fell another two ticks to reach 4.6%, and wage growth accelerated. Yet investors were not impressed. 

Treasury yields fell in the aftermath, taking the shine off the US dollar as expectations for swift Fed rate hikes were priced out. The market reaction suggests that while the labor market is healing quickly, it is not booming enough to force the FOMC into multiple rate increases next year. 

There’s also some extrapolating from foreign economies at play. The Bank of England got cold feet last week and didn’t raise interest rates, putting investors on alert for a similar disappointment by the Fed when the time comes. It seems central banks will tread cautiously, so anything less than stellar data isn’t enough to reawaken rate hike fears. 

This playbook will be put to the test on Wednesday when the latest edition of US inflation is released. Inflationary pressures are expected to have intensified further, with the Markit PMIs even hinting at an upside surprise as companies raised their selling prices "at the fastest pace on record". That might be just enough to set off another cascade of worries around faster Fed rate hikes and reignite the dollar’s rally.   

Wall Street goes wild

Stock markets have gone into overdrive in recent weeks. The S&P 500 closed at yet another record on Friday, drawing fuel from the retreat in Treasury yields. With the economy doing better but not so much that the Fed will slam on the brakes immediately, this is the sweet spot for equity markets.

The issue is that this entire market is starting to resemble one colossal momentum trade, empowered by a whirlwind in the options arena. A cheerful earnings season has seen volume in bullish options go through the roof, with momentum chasing strategies and forced dealer hedging adding fuel to the rally. Tesla and Nvidia are two prime examples. 

This is an incredibly unstable dynamic that can work the same 'magic' on the way down if market sentiment turns around. There are still several threats on the radar, from surging inflation forcing the Fed to accelerate normalization, to an earnings slowdown next year accompanied by the introduction of the minimum corporate tax, to credit risks and weaker growth in China. 

With markets so overextended, it wouldn’t take much to spark a correction. 

Sterling struggles, gold shines

Things have been relatively quiet in the broader FX complex. The British pound and the Japanese have been the only notable movers, with sterling still feeling the blues after the Bank of England’s change of heart and the yen capitalizing on the pullback in foreign bond yields. 

The retreat in yields also breathed life back into gold prices, which hit a two-month high on Friday. Bullion has essentially turned into a trade on how quickly the Fed will pull the rate hike trigger, benefiting every time normalization expectations are pushed back and suffering each time they are brought forward. 

Finally, the US Congress passed the infrastructure bill that includes $550 billion in new spending on Friday, although judging by the muted reaction, most of that was priced in already. The focus now turns to a parade of Fed speakers today, including Vice Chairman Clarida at 13:00 and Chairman Powell at 14:30 GMT. 

Latest News

RBNZ to deliver another double hike, spotlight on OCR projections - Forex News Preview

Week Ahead – A plethora of data, an RBNZ meeting, but focus on Fed minutes

Is China headed for a Lehman-style crisis?

Technical Analysis – Natural gas futures tick higher as bullish forces linger

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.