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Monday, Jan 10, 2022

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Tuesday, Jan 11, 2022

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Wednesday, Jan 12, 2022

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Thursday, Jan 13, 2022

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Friday, Jan 14, 2022

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Summary

United States: Strong Momentum Prior to Omicron, Despite December's Soft Payroll Print

• The Fed's more hawkish tone in December's FOMC minutes set the tone for financial markets this week, overshadowing the record surge in COVID infections. December's jobs data were disappointing and a bit confusing. Nonfarm employment rose far less that expected, with employers adding just 199K jobs. The household employment data, however, had another strong gain. The number of employed persons rose by 651K. The unemployment rate fell to 3.9%. Slightly softer-than-expected ISM manufacturing and services reports and a wider trade gap suggest supply-chain issues were easing prior to the Omicron surge. Unfortunately, that surge will likely reverse some of this improvement.
• Next week: CPI (Wednesday), Retail Sales (Friday), Industrial Production (Friday)

International: Eurozone Growth Likely to Slow, Inflation Potentially Nearing a Peak

• The Eurozone December CPI surprised to the upside with a gain of 5.0% year-over-year, although underlying inflation measures were steady to slower, hinting that a peak in inflation may not be far away. On the activity front, Eurozone retail sales rose solidly in November, though that came ahead of a significant surge in COVID cases in recent weeks, and a drop in Eurozone December economic confidence suggests slower growth last month.
• Next week: Australia Retail Sales (Tuesday), Brazil CPI (Tuesday), U.K. Monthly GDP (Friday)

Interest Rate Watch: The Bond Market is Pricing In More Fed Tightening

• The New Year has gotten underway with a notable rise in longer-term interest rates. Recent economic data have contributed to expectations of more aggressive Fed action.

Credit Market Insights: Holders of Student Loans Get Another Payment Reprieve

• The Biden administration has extended student relief to May 1, 2022, pushing back payments for more than 40 million Americans.

Topic of the Week: The Omicron Surge

• COVID is back, and it is everywhere. Fortunately, vaccines, therapeutics, increased immunity and the less intrinsic virulence of Omicron appear to be decreasing severe outcomes. That noted, the Omicron surge represents a clear downside risk to the near-term outlook.

Full report here.

U.S. Highlights

• The U.S. economy kicked off the New Year with an unprecedented surge in COVID-19 cases. While a return to lockdowns is not expected, rising cases could lead to greater absenteeism, as workers self-isolate due to exposure, putting pressure on already-tight labor supply.
• On the upside, several metrics suggests that the supply chain bottlenecks are beginning to ease. Specifically, supplier deliveries in both the manufacturing and services sector were faster in December than they have been in recent months.
• On the labor front, employment came in softer than expected with 199k jobs added in December. The unemployment rate however continued to trek lower, hitting 3.9% (from 4.2%) while the labor force participation rate held steady at 61.9%.

Canadian Highlights

• Canada’s economy added a healthy 55k jobs in December. The details included a strong increase in full-time employment and a slight drop in the unemployment rate.
• Extending the string of encouraging fourth quarter data, Canada also recorded a solid $3.1 billion merchandise trade surplus in November.
• Renewed restrictions across some provinces amid the Omicron wave will likely take a bite out of economic growth. Our first pass suggests an impact of around two percentage points on annualized growth in Q1.

U.S. - Supply Chain Strains Show Signs of Easing

The economic calendar was jammed packed to start the new year. First up, a rapid increase in COVID-19 cases is quickly dwarfing all previous waves (Chart 1). Fortunately, hospitalization rates are not rising as swiftly, but are still ticking up at the same time that healthcare capacity is constrained by staffing shortages. The surge in cases has prompted airlines to cancel flights and companies to cut services and reduce hours as infected workers self-isolate (though for fewer days than past waves). With worker shortages already a pressing issue, the current wave is likely to weigh on near-term business performance and slow the recovery in high-contact services.

Adding to business challenges, workers are quitting their jobs at record rates, while job openings remain near all-time highs. Employers continue to add jobs, but job growth in December came in notably shy of the 450k anticipated by the market, at 199k. The disappointment was softened somewhat by a net 141k upward revision to the two previous months. The unemployment rate also fell from 4.1% to 3.9%, narrowing in on its pre-pandemic level of 3.5%. With high demand for workers and increasingly limited supply, it is little surprise that wage growth remains hot. Average hourly wages were up 4.7% from year ago levels in December, slowing slightly from 5.1% in November.

Such strength in the labor market, combined with more persistent inflationary pressures has added urgency to the Federal Reserve’s task of curtailing pandemic-induced support measures. Minutes from the most recent FOMC meeting showed that more members are inclined to accelerate the pace of policy normalization. This culminated in the Fed’s decision to speed up the taper of their Quantitative Easing program and possibly faster rate increases.

On the production side, there was some good news on easing supply constraints. The ISM manufacturing index slipped to 58.7 in December from 61.1 in November. Despite the slip, manufacturing activity is still expanding at a healthy clip. More encouragingly, there were hints that supply-chain problems could be easing as the supplier delivery sub-index fell to 64.9 in December from 72.2 the previous month (Chart 2). The decline suggests that delivery times are improving, which is a relief given the severe bottlenecks that manufacturers have been facing.

There was also a pullback in the ISM services index to 62 from 69.1 in November. The outturn however was not unexpected, given that the previous reading hit a record. The service sector also saw improvement in supplier delivery times as the index fell by 11.8 percentage points to 63.9 – the lowest reading in the past eight months.

Further good news saw vehicle production levels in December improve from their September lows – inching back closer to the 1.1M recorded in November. While still well below the pre-pandemic level, the improvement points to further easing in supply constraints in this key economic sector. Unfortunately, all of this data is for a time before the latest pandemic wave, and we could very well see a reversal in the months ahead. Still, with evidence this wave is progressing even faster than past waves, its peak should also not be too far in the future, allowing with any luck for the continued return to economic normalcy.

Canada - Starting the Year on a Sombre Note

The Canadian economy ended 2020 on a strong note. This week's data flow corroborated the narrative that growth in the fourth quarter was notably sturdy. But, headwinds are imminent. The Omicron wave and recently announced restrictions across some provinces mean that Canada's economy will likely experience a soft patch in the first quarter of 2022.

This week's attention was centered on December's Labour Force Survey release, which once again, surprised to the upside. The economy added a robust 55K jobs in December. The details were similarly solid. Full-time employment rose by a whopping 123K, the unemployment rate edged down to 5.9%, and core age participation held sturdy at a record-high 88.3%. Employment is now 1.25% above pre-pandemic levels (Chart 1). Both the goods producing (+44K) and service producing (+11K) sectors saw gains on the month. From an industry perspective, it was encouraging to see a pick-up in hiring in the previously lagging construction industry. The one fly in the ointment was wage growth, which at 2.7% year-on-year is well below the 4.6% increase in the latest consumer price index data. Importantly, the report's reference period does not capture the expected layoffs in the service sector amid renewed restrictions.

It wasn't just labour markets that continued to surprise on the upside in Q4. Canada recorded a sixth consecutive merchandise trade surplus in November (Chart 2). At $3.1 billion, this is the largest surplus since the autumn of 2008. This materialized despite major disruptions to trade flows from the dismasying floods in B.C. during the month. Export volumes increased significantly (+3.5%), and strength was broad-based across the industries. Strong manufacturing sentiment in the U.S., sturdy global demand and high commodity prices have shored up Canada's trade balances in recent quarters, providing a much needed tailwind to economic growth.

Notwithstanding the constructive trajectory in Q4, recent developments portend some softness in Q1. The Omicron wave of infections and recently announced restrictions on the service sector will weigh on employment and real GDP growth in January. Similar to previous waves, the impacts are expected to be concentrated in service sector (hospitality, entertainment, fitness) activity and employment. Beyond the direct impacts, a potential increase in absences due to infections and school closures, as well as a possible rotation in spending towards goods may exacerbate existing supply pressures. While still subject to uncertainty, our first pass suggests an impact of roughly two percentage points on annualized economic growth during the first quarter. This is predicated on an assumption that restrictions are relaxed in February and that the current wave of infection subsides. The hope is that this hiccup is temporary, and that the subsequent recovery is swift.

A quiet economic calendar for Canada next week will keep the focus on virus developments. Provincial governments have re-introduced measures to slow virus spread, including mandated closures of high-contact services like restaurant dining rooms and gyms in Ontario and Quebec. We expect businesses within the travel and hospitality sectors to continue to bear the brunt of restrictions. Indeed, our card spending data already indicated a sharp decline in travel spending in December. And the exceptionally high rate of virus spread has probably pushed a large share of the workforce into self-isolation, adding to near-term labour supply issues in other sectors. All told, we expect Q1 GDP to look decidedly softer and have revised our growth projection to 1.5% from 4% for the quarter. With testing capacity overwhelmed in many regions, hospitalization rates will be carefully scrutinized for a sense of how quickly restrictions could be eased. This latest wave of COVID-19 is multiples larger than those that preceded it. But the speed of the spread means it’s also expected to run its course more quickly, we expect growth in the economy to bounce back in Q2.

Inflation data will remain a key issue in the United States, with CPI growth expected to tick above 7% on a year-over-year basis. That would be up from 6.8% in November—which was already the highest since the 1980s. Pandemic distortions continue to bias annual price growth higher compared to pre-pandemic levels, with used car and gasoline prices accounting for a disproportionate share of gains. But even controlling for those factors, price pressures have broadened. Central banks have been largely looking through expected near-term Omicron economic impacts and remain focused on both those price pressures and firming labour markets. We do not expect the latest wave of virus spread to prevent the US Fed (or the Bank of Canada) from hiking interest rates in the first half of this year.

Week ahead data watch:

United States CPI: Year-over-year price growth is expected to rise to 7.1% from 6.8% in November underpinned by higher used car prices. We also expect evidence of broadening price growth to continue in December.

US retail sales are expected to tick lower in December on lower auto and gasoline station sales. Retail sales remain very firm relative to pre-pandemic trends.

A welcome distraction

It’s been quite the start to the year, with omicron fears subsiding only to be replaced by interest rate anxiety once more. This could be the theme for the coming months, as policymakers are forced to take inflationary pressures more seriously in the hope that a little now will prevent the need for a lot more later.

Earnings season may bring a welcome distraction at a time when fear has again become a dominant driver of the markets. While inflation uncertainty is a major risk, it is worth remembering that the economy is in a very good place and the reporting season, starting next week, should provide a timely reminder of that.

Finally, it’s worth noting that there are various other volatility drivers in the markets at the moment and Russia is only involved in most of them. Although Putin did manage a sly dig at the CBRT in his annual address while praising his own central bank’s approach to inflation. It doesn’t seem President Erdogan has too many allies in his pursuit of low inflation through lower interest rates.

US

The coming week will include a very hot inflation report, the banks kicking off earnings season, US-Russia talks, and a bunch of Fed speak. Inflation is not letting up and will continue to make the Fed uneasy. On Wednesday, the headline year-over-year inflation reading is expected to rise from 6.8% to 7.1%, which is nearly a four-decade high. The last trading day of the week is filled with economic releases that should show a deceleration with retail sales, import price index, industrial production, and consumer sentiment.

EU 

Data next week is primarily made up of tier two and three releases which will have little bearing on the central bank in the coming months. Pressure is mounting after inflation hit another record high in December. Traders will be looking for any sign that policymakers will buckle under the pressure despite being assured until now that inflation is transitory.

UK

The tightening cycle got underway in December and traders will continue to monitor the data as markets price in four more hikes this year. But next week is void of tier-one releases, with the most notable being the NIESR GDP estimate on Monday and the official monthly GDP reading on Friday.

Russia

The highlight next week on the data front is inflation on Wednesday, with CPI seen falling slightly to 8.2%. This is still more than double its 4% target but heading in the right direction after an aggressive series of rate hikes from the central bank.

The focus will remain on other activities when it comes to Russia, as is so often the case. Whether that’s activity on the Ukrainian border, gas supplies to Europe (or lack of), or involvement in Kazakhstan.

South Africa

Next week is looking quiet with manufacturing production the only economic release of note.

Turkey

Turkey continues to prefer unconventional approaches to support the currency as it pursues lower interest rates at all costs. So far that has come in the form of soaring inflation (now at 36%) and a large portion of FX reserves as it tries to manipulate the currency and support state-owned businesses. Burning through reserves isn’t sustainable and while the lira is off its lows, it’s been sliding over the last couple of weeks. Erdogan is becoming more desperate and appears in no mood to change course.

China

Chinese property developers will dominate weekend news with Evergrande in a race to roll over CNY 4.5 billion of local denominated debt by this weekend. How this story evolves will determine whether Chinese equities continue retreating or recover on Monday. Additionally, the government appears to be moving towards treating debt used to buy up weak developers by SOE’s separate from official debt ratios. If confirmed as correct, it’s potentially bullish for China/HK equities.

China CPI on Wednesday won’t move the needle, but if the official trade balance falls on Friday sharply, that could weigh on local equities.

Watch for widening lockdowns of cities across China as omicron proves stubborn to remove.

India

The Indian Rupee is surprisingly resilient as other Asian currencies sell-off. The rally in post-omicron sentiment has renewed hot money inflows into India, supporting the INR and local equities. Watch the caseload in India however, it is rising quickly and will be a test of the premise that non-RNA vax countries will also see fewer hospitalizations. Potentially negative if incorrect.

Inflation on Friday has upside risks which could be a stagflationary negative for the INR and Sensex into the end of the week.

Australia 

No significant data. Watch for increasing state-wide restrictions as Omicron cases skyrocket. Harsher restrictions could be equity and AUD negative.

AUD is being driven by risk sentiment which is cautious in currency markets as US yields firm up on Fed tightening expectations.

New Zealand

No significant data.

NZD fading on Fed tightening sentiment as per AUD.

Watch for headlines of community omicron transmission, which could be a short-term negative for NZD and local equities, and RBNZ Feb hike could be postponed…again.

Japan

No significant data this week. USD/JPY remains at the mercy of the US/Japan rate differential. That widened this week as US yields soared pushing USD/JPY to 116.00. The Ministry of Finance has started “watching FX” rhetoric, signaling concern at the pace of decline.

The Nikkei continues to show a high correlation to directional movements on the Nasdaq. The BoJ quietly indicated this week they would not look to expand the balance sheet. The upcoming JGB auction this week, if poorly supported, could be a short-term negative for equities.

Economic Calendar

Saturday, Jan. 8

Events

• Atlanta Fed President Bostic and the ECB’s Schnabel speak at The American Economic Association/Allied Social Science Association virtual annual meeting continues

Sunday, Jan. 9

Events

• The BOE’s  Mann speaks at the virtual AEA meeting.
• Bilateral U.S.-Russia negotiations to begin in Geneva
• Iraq’s parliament convenes

Monday, Jan. 10

Economic Data/Events

• US wholesale inventories
• Atlanta Fed President Raphael Bostic speaks at the Rotary Club of Atlanta
• Australia building approvals
• Eurozone unemployment
• Italy unemployment

Tuesday, Jan. 11

Economic Data/Events

• Fed Chair Jerome Powell’s confirmation hearing in the Senate Banking Committee.
• Kansas City Fed President George speaks
• St. Louis Fed President Bullard speaks
• Australia trade balance, retail sales
• Mexico international reserves, industrial production
• South Africa manufacturing production
• Spain industrial production
• Turkey current account

Wednesday, Jan. 12

Economic Data/Events

• US CPI, Fed’s Beige Book, WASDE agricultural report
• China PPI, CPI
• Japan BOJ Governor Haruhiko Kuroda speech at the Branch Managers meeting.
• Eurozone industrial production
• India industrial production, CPI
• Russia CPI
• EIA Crude Oil Inventory Report

Thursday, Jan. 13

Economic Data/Events

• US initial jobless claims, PPI
• US Senate Banking Committee hearing for Lael Brainard nominated as Fed vice-chair.
• Richmond Fed President Barkin speaks at an event hosted by the Richmond Chamber of Commerce.
• Philadelphia Fed President Harker speaks at the Philadelphia Business Journal economic event.
• Chicago Fed President Evans speaks at an event hosted by the Milwaukee Business Journal.
• Turkey industrial production
• Italy industrial production
• Japan M2 money stock
• New Zealand building permits
• Norway Norges Bank 4Q survey of bank lending

Friday, Jan. 14

Economic Data/Events

• US Bank Earnings Season Begins: JPMorgan, Citigroup, and Wells Fargo report before the bell
• New York Fed President John Williams speaks at the Council on Foreign Relations.
• US retail sales, business inventories, industrial production, consumer sentiment
• China trade
• India trade, wholesale prices
• France CPI
• Japan PPI
• Spain CPI
• UK industrial production

The new year has kicked off with a sharp spike in yields, which has turbocharged the US dollar but demolished the Japanese yen. Whether this trend persists will depend on next week’s US inflation report, as that could decide whether the Fed will begin its rate hike cycle in March already. 

Peak US inflation soon? 

The US economy is in pretty good shape. The labor market will likely return to full employment this year, consumption is booming, the Atlanta Fed GDPNow model points to growth of 6.7% in the last quarter, and of course inflation is scorching hot.

As such, markets have started to entertain the idea that the Fed could raise interest rates as soon as March to combat inflation, currently pricing in an 85% probability for such an action. This has been a blessing for the dollar but a curse for the yen, as the Bank of Japan is not expected to follow suit anytime soon.

In this light, the upcoming CPI inflation data on Wednesday and retail sales report on Friday could be crucial. Forecasts suggest the yearly CPI rate held steady at 6.8% in December but the core number that excludes energy and food prices is expected to have jumped to 5.4% from 4.9% previously.

The latest PMI surveys from Markit support these projections. Selling prices by companies ‘rose steeply’, but at the slowest pace for three months, which is exactly in line with what the monthly CPI print is expected to show.

As for the dollar, a sharp spike in the core CPI rate coupled with a solid retail sales report may be just enough to cement expectations that the Fed will get the ball rolling in March. That could keep the reserve currency supported over the next few months.

Looking further out, however, the biggest risk for the dollar are any signs of ‘peak inflation’. A combination of stabilizing energy prices, supply chains coming back online, fading fiscal spending, and tougher year-over-year comparisons from April onwards seems like a recipe for inflation to peak later this year.

At that point, traders could dial back bets for powerful Fed tightening and US yields might correct lower, especially if the Republicans take control of Congress in the midterms, blocking new spending. Strap in, the dollar could trade like a rollercoaster this year.

Finally, note that Fed chief Powell will appear before Congress both on Tuesday and Thursday, for the hearings to confirm his second term.

British GDP coming up

The other big winner from the latest spike in yields has been the British pound. Investors seem to have concluded that Omicron isn’t dangerous enough to stop the Bank of England from raising interest rates, or even slow down its plans.

Money markets currently assign a 70% chance for the BoE to raise rates again next month, for a grand total of four hikes this year. This helped push euro/sterling to a new post-pandemic low this week, along with some remarks from Prime Minister Johnson that new covid restrictions are unlikely.

Next week will bring the GDP numbers for November on Tuesday, but those are unlikely to change this rosy narrative. For now, there is still scope for sterling to extend its recent gains, at least against the euro and yen, as markets become more confident about a February rate hike.

However, in the bigger picture, there are some risks. While the British jobs market is strong and inflation is elevated, the latest PMI surveys suggest economic growth is losing steam. If this trend persists, the BoE might only raise rates twice or three times this year, not four times as markets expect.

Chinese inflation also in the spotlight

Elsewhere, the most important release will be China’s own inflation report on Wednesday. Both consumer and producer prices are expected to have cooled in December, partly thanks to the fading power crisis. Trade data for the same month are due out on Friday.

The slowdown in producer prices could be especially crucial for markets, as it would suggest that China is exporting less inflation abroad, feeding the narrative that inflation globally may be approaching its peak.

Of course, the risk to all that is China’s zero-covid policy. The government has responded with draconian lockdowns in any cities that report covid cases, which threatens to keep the global supply chain under pressure for longer, even though disruptions have been mild so far.

The worsening outlook for Chinese growth coupled with the gloomy mood in stock markets may also explain why the commodity-linked Australian and New Zealand dollars performed so badly this week.

China’s trade numbers next week could be crucial for these currencies, with the aussie also paying attention to Australia’s final retail sales numbers for November that are due on Tuesday.

There is still a lot of focus on omicron, as global new cases have moved sharply higher, explained by the fact that the variant is better able to evade immunity, both vaccine-induced and from previous infections. More studies are supporting the hypothesis that omicron is milder (not only because of existing immunity) and investors are buying into the narrative. Still, risk is that there are so many new cases that it dominates the lower individual restrictions forcing governments to implement tougher restrictions. We discussed what we know about omicron in further details in COVID-19 Update: Omicron primer v2 - more studies support "milder but more infectious", 4 January.

The big waves mean that goods consumption is likely to remain elevated, while the production side of the economy will continue struggling due to a still lower labour force, more sick days and the still strict zero-COVID policy in China. Most recently, China implemented a partial lockdown in Ningbo affecting operations at the world's largest port, see Global News. The combination of all these factors means that bottlenecks are unlikely to ease much near-term (and may even get worse), which also means higher inflation pressure, all else equal.

The biggest market mover this week was the FOMC minutes from the December meeting. The minutes indicated that the Fed may already hike in March when tapering ends, which then opens the door for a total of four rate hikes this year. The Fed also hinted that it would like to start shrinking the balance sheet earlier and faster than last time, suggesting that "quantitative tightening" may start already at some point in the second half of the year. US 10yr government bond yields moved above 1.70% and stock markets took a big hit.

Looking ahead to next week, several interesting data are due out in the US. The most important one is the CPI inflation data for December due out on Thursday. Price increases (both for headline and core) have generally surprised to the upside, so do not be surprised if CPI headline and CPI core exceed 7% and 5% y/y, respectively. Besides that we also get retail sales in December (Friday). Also keep an eye on consumer confidence from University of Michigan (Friday) and the NFIB Small Business survey (Tuesday), which will shed more light on how tight labour market is and whether underlying inflation pressure continues to increase.

In China, the main release is credit data. Credit growth is one of the best leading indicator for the Chinese economy and hence also for the world economy. Credit growth has picked up over the past months from quite negative territory and we expect the trend of higher credit growth will continue here in Q1 driven by policy stimulus.

In the UK, monthly GDP in November is due out on Friday.

In the euro area, focus is on the sharp rise in new omicron cases and development in energy prices. Also focus on whether Mario Draghi plans to run in Italy's Presidential election and whether Macron is finally launching his official re-election bid in France.

In the Scandi, CPI data are due out for Denmark, Norwegian and Sweden. Also monthly GDP is due out in Sweden and Norway.

Full report in PDF.

Markets

December EMU inflation numbers and US payrolls featured on today’s agenda. European inflation accelerated by 0.4% M/M and from 4.9% Y/Y to 5% Y/Y. It’s the highest yearly reading since the creation of the EMU. Core inflation was unchanged at 2.6% Y/Y. The 5%-reading beat consensus, but didn’t really surprise following higher-than-expected inflation numbers in several European countries earlier this week. Details showed energy prices remain responsible for the lion share of the move (26% Y/Y), but services (2.4% Y/Y) and non-energy industrial goods (2.9%) prices rise more than 2% as well. Markets didn’t respond to the European inflation release and steadied into the US job market report. The outcome was a mixed bag. The headline figure printed at +199k, significantly below 450k consensus. Even when taking into account the +141k upward revision to the previous two month’s data, we’re talking about a 110k miss. The Covid-experience did teach us that wild (statistical) swings turned more rule than exception of late. Average hourly earnings rose more than forecast – 0.6% M/M and 4.7% Y/Y – in a sign of building wage pressure. The unemployment rate declined from 4.2% to 3.9% in a sign of stronger underlying job growth in the household survey. The outcome is the lowest since February 2020 and adds credibility to the Fed’s intention to speed up the normalization process (rate hike in March, together with end to net asset purchases; balance sheet run-off later this year). The drop in the unemployment rate came at an unchanged participation rate (61.9%). Unlike the stoic reaction to EMU inflation, (bond) markets judged the payrolls report as sufficient to keep the Fed on track with its accelerated normalization plans. US Treasuries drifted south, underperforming German Bunds. US yields currently rise by up to 3 bps, but intraday moves have been larger. The US 10-yr yield for example bumped into 1.77% resistance (2021 high), causing some return action. It looks unlikely that this key level will crack ahead of the weekend. German yield changes range between + 1 bp and -1 bps across the curve. The US dollar again failed to profit from the rising yield differential and even trades in the defensive. The trade-weighted greenback slides from a 96.30 open towards the 96 big figure. EUR/USD prefers the area north of the 1.13 big figure, but isn’t contemplating a throw at 1.1383 resistance. US stock markets opened slightly under water.

News Headlines

Polish CPI accelerated to a higher-than-expected 8.6% y/y (0.9% m/m) in December. Food prices printed at a strong 2.1% m/m, contributing the most to the November headline figure. However, KBC Economics calculations show core inflation rose as well to roughly 5.2% y/y. The sharp price increases suggest the National Bank of Poland’s tightening cycle is by no means over. After hiking 50 bps to 2.25% earlier this week, governor Glapinski hinted at a similar move in February but risks for a bigger step have just increased. The very short end of the Polish swap curve jumped more than 10 bps to be above 3%. The zloty strengthened to EUR/PLN 4.55, testing the October interim low. The move occurred hours after the release though.

The Canadian labour market again posted a strong performance in December. Net payrolls grew 54 700 while only a gain of 25 000 was expected. The rise was entirely due to full-time employment (+122.500) which was partially eroded by a decline of 67 700 in part-time jobs. Most jobs were added in the goods-producing sector (44 200 versus only 10.600 in services). The unemployment rate declined from 6.0% to 5.9%. Short-term developments in the Canadian labour market still might be affected by new containment measures due to the surge in Covid- cases. Even so, the data still support the case for an ‘early’ BOC rate hike. Markets currently discount a first rate hike for the early March meeting. The Canadian dollar gained modestly after the data. USD/CAD trades near 1.27.

Stock markets are back in the red on the final day of the week as investors continue to fret about the prospect of higher interest rates this year.

Whether this is just an exhaustion of the omicron relief trade, a case of January blues that will quickly be forgotten once earnings season gets underway next week, or something more significant will only become clear later this month.

But the data isn't offering investors much chance for relief and the jobs report is just another example of that. The headline NFP miss was never going to generate too much relief as signs of tightness elsewhere is always going to take priority. That said, investors may feel they've dodged a bullet as the million new jobs that some predicted could have further convinced policymakers that the US is close to, or at, full employment.

But the average earnings numbers, higher participation, and drop in the unemployment rate will surely overshadow the NFP number as far as the central bank is concerned. Higher participation is encouraging, as the slow recovery on this front is a major contributor to the tight labour market. But wages rising faster than expected will add to the prolonged inflationary pressures which will concern the Fed.

Will ECB fall in line with peers?

Inflation in the eurozone unexpectedly hit another record high in December, intensifying pressure on the ECB to follow in the footsteps of many of its peers and tighten monetary policy. The central bank is now among a minority that view inflation as transitory and while it may be proven correct, the data doesn't make for easy reading.

Other central banks have abandoned the transitory line recently and this will only increase calls for the ECB to do the same. Policymakers appear to firmly believe that inflation will fall without rate hikes over the course of this year. The question now becomes whether they will be afforded the time to be proven right or align with others and the markets.

Oil at two month high as OPEC struggles to hit quotas

Oil prices are continuing to climb at the end of the week as unrest in Kazakhstan and lower output from Libya further hamper producers' ability to gradually return to pre-pandemic levels. We are already seeing OPEC+ struggle to deliver the agreed 400,000 barrel per day increase and this is further exacerbating the problem.

And it's happening at a time when demand is expected to remain strong thanks to omicron symptoms being mild by comparison to other variants. It's no wonder prices are almost back at November highs, with WTI now back above $80 for the first time in two months.

The bullish case for gold is weak

Gold is marginally higher on the day after experiencing a surge in volatility around the release of the jobs report. The yellow metal spiked in the immediate aftermath of the release, with the big NFP miss hitting the dollar. But as is so often the case on jobs day, the knee-jerk reaction to the headline NFP number turned out to be the wrong one overall, and the move was quickly reversed. Volatility has remained since but it appears to be settling a little higher than pre-NFP levels.

There's a lot to digest in the jobs report and it can sometimes take a little time for that to happen. Ultimately, the takeaway has to be that the report doesn't make rate hikes or balance sheet reduction any less likely, especially with wages rising as much as they did. That's not good news for gold and so the bullish case remains weak as it struggles to get a hold of $1,800 again.

Jobs report delivers a blow to bitcoin

It would appear bitcoin traders weren't particularly thrilled with the jobs report either, with the cryptocurrency adding to its post-Fed losses in the immediate aftermath of the release. If loose monetary policy has been one of the major catalysts for the bitcoin boom this last couple of years then the crypto crowd may be in for a rough 2022 as central banks, Fed included, are in tightening mode. And today's wage growth figures will only further galvanize them into acting to slow the pace of inflation. Somehow I don't think they'll be deterred for too long.

AUDUSD is struggling to push further north of the 0.7300 mark as the 50- and 100-day simple moving averages (SMAs) along with the Ichimoku cloud are directing the pair lower. The overall bearish demeanour of the SMAs is defending the gradual drop in the pair.

The Ichimoku lines are not indicating a dominant directional drive in the pair, while the short-term oscillators are suggesting that negative momentum is growing in power. The MACD has nudged below its red trigger and zero threshold, while the RSI is falling in the bearish region. The stochastic oscillators’ negative charge is promoting additional downward moves in the pair.

If the price continues to glide lower, immediate downside hindrance could occur at the flattening blue Kijun-sen line at 0.7134 ahead of the 0.7082 barrier. Sustaining the bearish trajectory, sellers may then confront the critical 0.6963-0.7020 support foundation, which has safeguarded the broader positive structure since October 2020. From here, if the pair steers south of this boundary, it could target the 0.6900 mark, triggering considerable worries about further deterioration in the pair.

To the upside, buyers are promptly challenged with the cloud, the adjacent red Tenkan-sen line at 0.7203 and the 50-day SMA at 0.7220. Ticking slightly higher, the congested obstacles being the cloud’s upper band at 0.7203 and the 100-day SMA at 0.7290 may cause some difficulty for bullish momentum to gain ignition. However, if buyers are triumphant, they could propel the price towards the 0.7370 high before aiming for the 200-day SMA at 0.7426.

Summarizing, AUDUSD’s positive forces are still losing power and the pair is adopting a neutral-to-bearish bias. That said, for bullish momentum to strengthen, the recent price bounce within the 06963-0.7020 base would need to push beyond the cloud and the 100-day SMA at 0.7290.