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Summary

United States: Economic Growth Remains on a Positive Trajectory, For Now

• During December, payrolls rose by 223K while the unemployment rate fell to 3.5% and average hourly earnings eased 0.3%. Job openings (JOLTS) edged down to 10.46 million in November. ISM manufacturing fell to 48.4 in December, while the services index unexpectedly dropped to 49.6. Construction spending increased 0.2% in November. The U.S. trade deficit narrowed to $61.5 billion in November.
• Next week: Small Business Optimism (Tue), CPI (Thu), Consumer Sentiment (Fri)

International: Fiscal Policy Has Brazil Off to a Rocky Start

• Enhanced government spending has the potential to place Brazil's sovereign debt burden on a more unsustainable trajectory. With Brazil's public finances already in a precarious position and Lula now officially sworn into office, concerns regarding a lack of fiscal discipline are starting to materialize and shake confidence.
• Next week: Mexico Inflation (Mon), Brazil Inflation (Tue), Central Bank of Peru (Thu)

Interest Rate Watch: Clear Message from December Minutes: Higher Rates for Longer

• The minutes from the Fed's latest policy meeting in December were released on Wednesday and highlighted a mildly-hawkish to neutral tone from Fed officials headed into last month's meeting. What stands out to us is the Fed's direct communication: Don't underestimate its reaction function. Expect rates to remain higher for longer.

Credit Market Insights: The Housing Market is Collateral Damage

• As the Fed continues its inflation fight, elevated mortgage rates have crushed affordability for potential homebuyers. The Mortgage Bankers Association (MBA) reported that refinance mortgage applications fell 86.6% year-over-year in the last week of December, and applications for purchase were down 42.4%. While home prices have started to slide, we do not expect price declines as severe as the housing bust.

Topic of the Week: House Arrest: What a Perilous Speaker Vote Means for the Budget

• The U.S. House of Representatives continues its quest for a speaker. On Tuesday, the chamber went to a second ballot for the first time in a century after Representative Kevin McCarthy (R-CA) fell short of the votes needed to secure the speaker position.

Full report here.

US

This week’s main event will be when a little inflation report comes out. The US CPI report for December is expected to show disinflation trends remain firmly in place.  The year-over-year CPI reading is expected to cool from 7.1% to 6.6%, while the monthly reading is expected to remain flat. At the end of the week, the University of Michigan sentiment report is expected to show a modest improvement and could show inflation expectations continue to come down.

Earnings season begins on Friday, and everyone will pay close attention to what the banks say about the economy.  Recession calls could get a major boost if JPMorgan, Citigroup, and Wells Fargo turn pessimistic about the consumer.

US politics will dominate weekend headlines as Republicans try to elect a speaker.  The House can’t function without a speaker and this impasse has implications for national security-related briefings and oversight.

EU 

A quiet week in store with only a few relatively small data points due, the most notable of which being the unemployment report for the eurozone. All eyes now on the ECB meeting early next month after the December inflation data showed price growth slowing considerably but underlying core prices rising.

UK 

A few Bank of England policymakers are due to speak over the next week, including Catherine Mann on Saturday and Huw Pill on Sunday which may help set the tone for the week. Governor Andrew Bailey will also make an appearance on Tuesday so we could get a better idea of where they stand in the new year.

That aside it’s pretty quiet from a UK data standpoint with monthly GDP figures on Friday the only notable releases as we look for confirmation of the economy being in recession.

Russia

A quiet one next week with inflation data on Wednesday the only notable release. Focus remains on the war in Ukraine and what the next development in that will be.

South Africa

Government efforts to amend the mandate of the SARB have not been greeted well by the markets, the view being that any changes could weaken its inflation commitment and blur the lines between the institutions. The currency has weakened in response to the reports although any changes are not likely to occur any time soon and probably not at all if past attempts are anything to go by. The government doesn’t have the super-majority required to make the constitutional changes without help from opposition parties.

Turkey

Unemployment and industrial production figures are the only notable releases next week.

Switzerland

A very quiet week with unemployment the only release of note.

China

In the last week of 2022, China announced that people entering the country would no longer be required to undergo quarantine. It’s one of the most important steps the world’s second-largest economy has taken toward reopening to the world since the start of the pandemic. China has resumed its international contact with countries around the world.

At the same time, China will also relax the Covid controls for international arrivals from 8 January 2023, downgrading Covid management from Category A to Category B. The most important measure is that international arrivals will no longer be subject to testing and quarantine. International arrivals will only be required to have a negative PCR test within 48 hours prior to departure. They will no longer need to apply for a health code, as travelers will only need to declare their health status on their customs cards.

The centralized quarantine system has also been lifted in China, and the movement of people within the country is about to return to pre-pandemic conditions. Health authorities in China and abroad are concerned about the lack of herd immunity in China due to the long-standing zero-Covid policy and the relatively low vaccination rate of high-risk groups in the country over the past three years. A number of countries have now introduced certain restrictions on the entry of Chinese tourists in terms of testing and quarantine measures. The Chinese government’s subsequent response to a large number of confirmed new cases will be one of the risk events that the market will be watching.

As several countries and regions worldwide may enter a recession in 2023, external demand will decline, and export-related activities, including manufacturing, may slow down, hindering China’s economic recovery. China’s economic recovery may only get going in the second half of this year. The Chinese government is expected to increase its financial strength to support the domestic economy by continuing to build unfinished domestic projects and perhaps developing more transport, energy, and technology infrastructure.

Next week brings CPI data for December which is expected to have little impact on the market.

India

A few releases of note next week including inflation and industrial output on Thursday.

Australia & New Zealand

China has recently eased the domestic and international Covid policy and the rebound in the economy is expected to boost demand for commodities such as iron ore. This could be supportive for commodity currencies this year.

Australian retail sales and the RBA CPI  are eyed for further guidance on whether the inflation level has improved.

Japan

The Bank of Japan unexpectedly adjusted its government bond yield curve control on 20 December, triggering a spike in the yen. In response, the December summary of opinions stated that the revision of the YCC would help improve market functioning, that it was not an exit policy shift, and that Quantitative and Qualitative Easing (QQE) and YCC should continue if needed. Traders are not convinced.

Next week focuses on the Japan Tokyo CPI, core CPI, and CPI excluding fresh food for further guidance on the level and path of inflation in Japan.

Economic Calendar

Saturday, Jan. 7

Economic Events

• BOE’s Mann speaks on the world economy

Sunday, Jan. 8

• BOE’s Pill speaks on monetary policy at the AEA meeting in New Orleans
• NATO Secretary General Stoltenberg and Swedish PM Kristersson speak at the Security Policy conference Folk och Forsvar in Sweden

Monday, Jan. 9

Economic Data/Events

• Australia foreign reserves
• Singapore foreign reserves
• Australia building approvals
• China aggregate financing, money supply, new yuan loans
• Czech Republic GDP
• Eurozone unemployment
• France trade
• Germany industrial production
• Italy unemployment
• Mexico CPI
• Thailand consumer confidence
• Fed’s Bostic in moderated discussion on the economy at the Rotary Club of Atlanta
• BOE’s Pill speaks on the UK economic and monetary policy outlook at Money Marketeers event
• Norwegian Petroleum Directorate annual report
• Swiss National Bank releases 2022 results

Tuesday, Jan. 10

Economic Data/Events

• US wholesale inventories
• Colombia retail sales
• France industrial production
• Japan household spending, Tokyo CPI
• Mexico international reserves
• New Zealand house sales
• Philippines trade
• South Korea BoP
• South Africa manufacturing production
• Spain industrial production
• Turkey industrial production
• Symposium at Riksbank in Stockholm. Speeches by Fed Chair Powell, BOE Governor Bailey, ECB’s Schnabel, de Cos, and Knot
• World Bank expected to release global economic prospects report

Wednesday, Jan. 11

Economic Data/Event

• Australia retail sales, CPI, job vacancies
• China FDI
• Japan leading index
• Mexico industrial production
• New Zealand home sales, commodity prices
• Turkey current account
• ECB’s Holzmann and Vujcic speak in Vienna at the Euromoney CEE conference
• Bank of Italy releases banks and money monthly statistics

Thursday, Jan. 12

Economic Data/Events

• US CPI, initial jobless claims
• India CPI
• Australia trade
• China CPI, PPI
• India industrial production
• Japan BoP
• New Zealand building permits
• Fed’s Bullard discusses the economy and monetary policy at a virtual event hosted by the Wisconsin Bankers Association
• Fed’s Barkin speaks at VBA/VA Chamber
• ECB consumer expectations survey for November, and economic bulletin
• USDA releases monthly world agricultural supply/demand estimates (WASDE)

Friday, Jan. 13

Economic Data/Events

• US University of Michigan consumer sentiment
• France CPI
• Poland CPI
• Russia CPI
• Australia home loans
• Canada existing home sales
• China trade
• Eurozone industrial production
• India trade
• Italy industrial production
• Japan money stock
• Thailand forward contracts, foreign reserves
• UK industrial production
• Czech Republic presidential elections first round voting starts
• Earnings Season Reports from: BlackRock, Citigroup, Delta Air Lines, Didi Global, First Republic, JPMorgan Chase, UnitedHealth Group, and Wells Fargo
• Italy’s Istat releases monthly economic note

Sovereign Rating Updates

• Poland (Fitch)
• Spain (Moody’s)
• Iceland (Moody’s)
• Ireland (DBRS)

US ISM Services PMI dropped sharply from 56.5 to 49.6 in December, well below expectation of 55.5. Business activity/production tumbled from 64.7 to 54.7. New orders dropped from 56.0 to 45.2. Employment dropped from -1.7 to 49.8. Prices dropped from 70.0 to 67.6.

ISM said: "The past relationship between the Services PMI and the overall economy indicates that the Services PMI for December (49.6 percent) corresponds to a 0.2-percent decrease in real gross domestic product (GDP) on an annualized basis."

Full release here.

U.S. December inflation data will be watched closely next week for fresh evidence that early easing in price growth in recent months could be sustained. We expect year-over-year U.S. consumer price growth to slow significantly in December to 6.3% from 7.1% in November. That would be the lowest level of annual price growth since October 2021 and below the peak 9.1% rate in June 2022. The steep decline in headline price growth is largely thanks to a significant drop in energy prices. Average gasoline prices fell 10% (seasonally adjusted) in December from November on lower oil prices.

But broader measures of inflation have also shown signs of slowing. Grocery prices have continued to surge higher, but the pace of increase has pulled back. We expect ‘core’ (excluding food & energy products) price growth to slow to 5.6% year-over-year in December from 6.0% in October. By our count, almost half of the year-over-year increase in ‘core’ price growth is coming from higher home rents as earlier price increases pass through the CPI with a lag as leases are renewed. The rise in rents will moderate in the year ahead, reflecting significantly slower growth in the current rental market.

Federal Reserve policymakers will be paying more attention to signs that suggest the early softening in broader inflation pressures will persist. Price growth for purchased goods has been slowing as global supply chain and cost pressures ease. And prices of services excluding home rents (a key indicator of domestically driven inflation) has also been slowing over the second half of 2022.

Further signs of declining price growth would support further slowing in the pace of hikes from the Fed. We continue to expect 50 basis point of additional hikes to the Fed funds target range in Q1 before a pause at a terminal rate of 4.75% to 5.0%.

Week ahead data watch

• Housing starts likely remained steady at 260,000 units in December from the annual pace of 264,159 units in November. Residential building permit issuance was still strong in October, with a 3-month rolling average value of 266,000.

2023 has arrived and it looks set to be another interesting year for financial markets. Diverging forces are at play leaving markets in a tug of war between different drivers.

In bond markets lower inflation and recession points to lower yields, but on the other hand still strong labour markets and high wage pressures as well as the Chinese reopening, which is set to be an inflationary force, is pulling in the other direction. An easing of financial conditions also challenge central banks as tighter conditions are needed to cool down the economy further. Hence, we see a risk of more hikes (and fewer cuts in H2 and 2024) than markets currently price - especially in the US. We look for bond yields to be range bound for some time caught in the middle of the diverging forces.

In equity markets lower inflation, somewhat better visibility than in 2023, the Chinese reopening as well as plenty of cash on the sideline are all positive forces that could reduce risk premia and underpin stocks. However, the outlook of recession, still hawkish central banks and profits under pressure still point to a more defensive stance. We believe stocks will end the year higher but see the short-term outlook being murky still. EM should benefit from the Chinese reopening as we have seen reflected in markets also lately.

In the FX market we see more two-way action for the USD. The USD has weakened lately but we look for a rebound as the market prices too few Fed hikes and current account imbalances still favour the USD. We look for EUR/USD to go back to previous lows around 0.98 over coming quarters but it is unlikely to happen in a straight line.

We see increasing signs that headline inflation has peaked. German inflation for December dropped to 8.6% y/y from 10.0% y/y while Spanish inflation declined to 5.8% y/y from 6.8% y/y. However, the drop in Germany was driven by a government-backed discount to the energy bill and core inflation was high in both countries. Oil and gas prices have moved lower this week adding downward pressure on goods inflation and transport services. However, a key concern for the ECB is still the tight labour market. In an interview last week, ECB President Christine Lagarde said that wages are probably rising faster than expected and limiting fast wage growth was key to reining in inflation.

The Fed also struck a hawkish tone in the FOMC minutes from the December meeting and Fed member Neel Kaskhari (voter, hawk) said on Wednesday he sees rates move to 5.4% (market prices peak around 5%). Like ECB, the Fed also highlights a tight labour market as key for sustaining the tightening path. In addition, easing financial conditions is a concern for the Fed, see also Research US - Good news is bad news for the Fed, 4 January.

China' re-opening has led to a surge in Covid cases, but the wave looks set to peak within the next month. We look for a recovery starting in February/March, which will make China an inflationary force in the global economy again, see China Outlook - Earlier reopening to drive faster rebound, 3 January.

Next week all eyes will be on the US CPI for December. Lower gasoline and food prices will likely weigh on the headline (0.0% m/m), but services will continue to support core (0.3% m/m). In the euro area, we will keep an eye on data for unemployment and ECB comments following the recent CPI prints.

Full report in PDF.

The second week of the new trading year brings a busier calendar in the Asian powerhouse. There are a plethora of data releases starting with Tokyo CPIs and ending with flow statistics on Friday. With the first BoJ meeting for 2023 scheduled on January 18, the market will have the chance to discover if there are dramatic changes in the underlying economic currents. And potentially offer some excuse for the BoJ hawks to reappear.

Could the BoJ get a lifeline from the data?

The BoJ has been on the sidelines in the current rate hiking race, joining just a handful of the developed world central banks that did not raise interest rates in 2022. It has actually been 16 years since the last BoJ rate hike. However, potentially under domestic pressure, the BoJ managed to steal the headlines before the festive period with its surprising decision to alter the yield curve control. It currently allows the 10-year yield to rise up to 0.5%, double the previous ceiling of just 0.25%.

Inside the same announcement, it mentioned that it will continue to buy Japanese bonds at an increased rate of JPY 9tln per month, the previous pace was JPY 7.3tln per month, but the market, in its inherent need for hawkish news, ignored this side of the story. The post-announcement hawkish market reaction has increased expectations for the new BoJ Governor taking over on April 9. The 40% probability of a 25-bps rate hike in April currently priced in could potentially nudge higher, on the back of the upcoming data and the market chatter about the new man-in-charge.

Tokyo CPI frontrunning the nationwide print

The trading week starts with Tokyo CPI for December. This regional CPI tends to come at least 2 weeks earlier than the national CPI, providing an early preview of the inflation pressures. The November print came at 3.7% surpassing the May 2014 peak remove extra space and recording the highest growth since January 1991. While the headline inflation numbers look tempting for the BoJ, the muted core inflation index, excluding food, energy, and alcoholic beverages seems to have put a firm lid on any hawkish thoughts up to now. It remains pinned down at the 1-1.5% region for both the Tokyo region and nationwide.

Leading indicator and Current Account details not painting a rosy picture

Since the inflation prints are not offering sufficient evidence, the JPY bulls have turned to the remaining set of data. For example, the Tankan, considered the heavyweight in the data calendar, has been improving lately. The next quarterly print comes in April, but the leading indicator, published on Wednesday, tends to offer an early preview for the possible moves ahead. It has been on a downward path, flashing red for a bumpy road ahead. On a similar note, the Current Account statistics have turned negative on the back of the increased oil prices and the inflation rally reducing goods demand globally. Putting the above-mentioned findings together, the picture remains muddy in Japan, potentially tying BoJ’s hands.

Flow data could get more attention going forward

The latest portfolio investment numbers will also be released. On Wednesday, January 4, the weekly flow statistics for the penultimate week of 2022 showed that foreign investors sold an unprecedented amount of Japanese government bonds, and that Japanese investors continued to shed foreign long-term debt securities. The former move appears to be pure positioning for a bearish BoJ, while the latter refers mostly to life insurers cutting foreign exposure to reduce their hedging costs. Historically, flows matter for the Japanese economy and the yen, and it would be interesting to see whether the recovery seen in the yen since late October could rekindle the Japanese investors’ love for foreign securities.

Dollar/yen downward path in question?

Amidst the volatile fourth quarter, the yen managed to benefit from the dollar underperformance and recovered part of its 2022 losses. It is currently caught up in an area that proved tough to clear in early August. The overall sentiment in the market appears to remain yen bullish, but the momentum indicators are starting to display signs of exhaustion, predominantly the stochastic oscillator. A confident move below the April 28 high at 131.34 could prove the triggering factor for the yen bulls to aim for a new lower low in the dollar/yen pair.

After a choppy start to the new year, markets will be bracing for the next set of CPI data out of the United States next week amid ongoing unease about Fed policy. Inflation stats are also due out of Australia, while in the United Kingdom, monthly GDP numbers could stoke recession fears yet again. China’s economy will be at the forefront of investors’ minds too as the December economic indicators start rolling in. But a potentially bigger market-moving event is a gathering of central bankers in Sweden where Fed chief Jerome Powell will be participating.

Will US CPI maintain its descent?

Markets may have given up hope of an early Fed pivot but they are still not convinced that rates will have to be raised too high into restrictive territory. The consumer price index for December due Thursday will be the next vital release that will either bolster bets of a more aggressive Fed or undermine policymakers’ warnings of additional rate increases to come.

Inflation is clearly on the way down in the US. The question now is: how long will it take for it to fall back to within the Fed’s 2% goal and is there a risk it could begin to creep back up again before reaching the target? The December CPI readings will further paint the picture on this. After falling to 7.1% in October, America’s inflation rate could drop below 7% in December for the first time in 13 months. The month-on-month rate is predicted to maintain the lowly pace of 0.1%, but the core measure could quicken slightly from 0.2% to 0.3% m/m.

There will be further views on inflationary pressures on Friday from the University of Michigan’s closely watched consumer sentiment survey. Although consumer sentiment has barely recovered from all-time lows and only a slight pickup is anticipated in the index in January, the survey’s gauges of consumer inflation expectations have been more encouraging. Both one- and five-year inflation expectations confirm the recent peak highlighted by the other price metrics and if there is a further decline in January, this could lift sentiment at the end of the trading week.

The US dollar has been directionless lately as the rising threat of the US economy tipping into recession has offset the boost from the Fed’s ultra-hawkish stance. It’s been somewhat of a similar story on Wall Street and stocks continue to struggle. But with concerns about weakening demand growing by the day, it will be difficult to get anything more than a short-term bounce in risk assets should the inflation figures undershoot expectations.

Riksbank symposium eyed as Powell attends

However, the dollar may find some love on Tuesday when Chair Powell is set to speak at an international symposium on central bank independence, organized by Sweden’s Riksbank. Other prominent speakers will include the Bank of England’s Bailey, the Bank of Canada’s Macklem and the Bank of Japan’s Kuroda, who will soon be departing from the central bank world like his host Stefan Ingves of the Riksbank.

But all eyes will probably be on Powell, who has not made any public remarks since the December FOMC press conference. Given the theme of the symposium, it’s likely that Powell will refrain from commenting on domestic policy, but any fresh views on the interest rate outlook could lift the dollar.

Are China’s woes over?

Aside from Fed policy, another uncertainty weighing heavily on the markets lately has been China’s Covid response. After a year of endless shutdowns that have ravaged the Chinese economy, Beijing’s abrupt change of heart about zero-Covid policy has been bittersweet for the markets. Although military-style lockdowns are now a thing of the past, surging infections have meant that consumers are still not spending as much and businesses are being disrupted from workers calling in sick. Hopes of a quick economic turnaround have subsequently been dashed, with commodities such as oil taking a substantial hit from this reality check.

However, if investors spot some signs of stabilization in the data towards the year end, this may be taken as a positive development. The first opportunity for this will come on Thursday with the December CPI and PPI publications where any uptick in price pressures would indicate a demand recovery is underway. On Friday, the latest trade numbers are due. In October and November, China was in the unusual position of reporting back-to-back yearly declines in both exports and imports, underscoring the unsustainability of zero Covid.

Inflation data may pose upside risk for the aussie

Any improvement in the December readings could buoy equities as well as the Australian dollar, as China is Australia’s biggest export customer. Domestically, CPI figures out on Wednesday will also be crucial for the aussie. Like in most countries, inflation appears to be peaking down under, but the Reserve Bank of Australia might have nevertheless jumped the gun by downshifting to 25-bps hikes or even considering pausing soon.

At 6.9%, inflation is far too high and the RBA may be underestimating how difficult it will be to get it all the way down to its 2-3% target band. Hence, an upside surprise could further bolster the aussie, which is up a whopping 10% from its October lows.

Pound might not have much to cheer about in 2023

Despite an impressive rebound in the autumn, the pound could not dodge being one of the worst performing major currencies of 2022. Moreover, the uptrend began to falter in December and there could be more pain to come in 2023. It’s highly likely that the UK economy is already in recession and even if the energy crunch continues to subside, there are other problems facing Britain. A cost-of-living crisis made worse by Brexit, the largest wave of strike action since the 1970s, a health service under crippling pressure and a dysfunctional government unable to deal with all the problems doesn’t exactly invoke confidence in the economy or in sterling.

Next week’s batch of data will likely serve as a reminder to investors about the challenges the British economy faces in returning to its pre-pandemic glory. After bouncing back in October, GDP is expected to have contracted again in November. Breakdown figures including industrial production will also be released, along with trade numbers for the same month.

Positive surprises cannot be ruled out, but the risk to the pound is generally skewed to the downside. Unless the dollar suffers a major selloff, it’s hard to see cable matching its December peak of $1.2445 in the near term.

Euro remains resilient against dollar

Across the channel, it’s mostly second-tier releases for the euro area, with the main one being German industrial output for November on Monday and the Eurozone-wide print on Friday. Like the pound, the euro has given up some gains and is off its December highs, but has overall been more resilient, retaining some upward drive. If the US inflation data misses expectations, the euro might just be able to crack the $1.07 barrier.

In Japan, the December CPI estimates for the Tokyo region are due on Tuesday. These will be watched for signs of a further acceleration in Japanese inflation amid intensifying speculation that the Bank of Japan will soon take another step towards exiting its ultra-accommodative stance.

Markets

It was a big day datawise, but less so marketwise. Let’s start with the numbers. EMU headline inflation fell as expected more than forecast following earlier national releases: down 0.3% M/M with the Y/Y-reading sliding from 10.1% to 9.2%. It’s the first single digit reading since August. The monthly drop was almost solely due to the fall in German energy prices (fiscal support to pay for customer’s natural gas bills). When stripping out the volatile energy and food components, core inflation extended its upward trend: from 5% Y/Y in November to a new EMU record high of 5.2% in December. It strengthens the case for ECB policy normalization as core/services inflation is the needle in the ECB (and Fed) compass. On other side of the Atlantic, US payrolls beat consensus (223k vs 203k). However, taking into account a 28k downward revision to the previous two months’ numbers, brings the report close to expectations. Average hourly earnings rose less than expected (0.3% M/M and 4.6% Y/Y) and were the item that triggered a market response (see below). The separate household survey was extremely strong with employment rising by 717k and unemployment falling by 278k. It results in a decline of the unemployment rate from 3.7% to 3.5%, matching the cycle and multidecade low. The labour force participation rate increased from 62.1% to 62.3%. Apart from March 2022 (62.4%), it’s the highest level since the start of the Covid pandemic early 2020.

Turning to markets: they first ignored the EMU CPI numbers and next zoomed in on lower-than-expected US wage growth instead of labour market strength. The reasoning is simple, but shortsighted. Fed Chair Powell more than once stressed the risk of wage inflation feeding into core services inflation if the labour market stays strong. This would warrant an even more hawkish course by the Fed. Currently, the market is split between a 25 bps and a 50 bps rate hike early February. We look for more clues in upcoming speeches by Fed governors. Up until now, most of them struck a hawkish (but ignored) tone. We side with another 50 bps hike. EUR/USD drifted below 1.05 for the first time since early December ahead of the payrolls report, but rebounded to 1.0530 afterwards. The US yield curve turns less inverse with yields losing up to 4.9 bps at the front end of the curve (2-yr). In Germany, it’s the very long end of the curve which outperforms with the 30-yr yield down 5.8 bps on the day. US stock markets open with small gains to the tune of 0.5-1%.

News Headlines

Canadian payrolls crushed forecasts. Job growth amounted to 104k in December, far more than the 5k projected. Full-time employment carried the bulk (84.5k). The strong increase unexpectedly lowered the unemployment rate from 5.1% to 5%, only one tenth of a percent above the record low seen mid last year. This was the case even as the participation rate nudged higher from 64.8% to 65%. A tight Canadian labour market results in lofty wage increases. Though slower than in November, wages grew at another 5%+ pace. The Bank of Canada in December lifted policy rates by 50 bps. At 4.25% and considering the already delivered monetary tightening (400 bps), the BoC’s stance turned more neutral and data-dependent. Markets before the publication discounted a 65% chance for a 25 bps hike later this month. That is now 85%. Canadian swap yields extend an earlier rise, adding up to 5 bps at the front. USD/CAD reversed course and went from 1.366 to 1.354 with a touch of USD weakness helping the move as well.

South Africa’s ruling party, the ANC, wants to broaden the central bank’s (SARB) mandate so that it can play a bigger role in supporting the economy. The SARB pursues an inflation-targeting strategy aiming for balanced and sustainable growth. It has repeatedly said that current obstacles to higher growth are outside the scope of monetary policy. The proposal is still under discussion within the ANC, after which it will be sent to Parliament, the ANC chairman said. As it may require a constitutional amendment to the mandate, the vote would need approval from two thirds of lawmakers. The ANC only controls 58%. South Africa’s rand dipped after the story. EUR/ZAR is trading around 18.2, up from the low 18 area this morning. USD/ZAR rose from 17.17 to 17.30.

The U.S. economy added 223k jobs in December, slightly above the consensus forecast for 200k. Revisions to the two prior months were negative, subtracting 28k from the previously reported figures. For the year, non-farm payrolls showed the U.S. economy added 4.5 million jobs and ended the year with employment 0.8% above pre-pandemic levels.

Employment gains on the service-side (+180k) were largely concentrated in education & health care (+78k), leisure & hospitality (+67k), and other services (+14k). Professional & business services (-6k) and information services (-5k) both shed jobs on the month, though the former was largely due to another sharp decline in temporary help services (-35k). Goods producing industries (+40k) had another solid month, with gains concentrated in construction (+28k). The manufacturing sector added 8k jobs.

In the household survey, civilian employment recorded a sizeable gain of 717k, while the labor force grew by a smaller (but still robust) 439k. As a result, the unemployment rate ticked lower by 0.1 percentage points (pp) to 3.5% –returning to its 50-year low. The participation rate edged higher by 0.1pp, rising to 62.3%, and ending the year 0.1pp above where it started.

Average hourly earnings rose 0.3% month-on-month (m/m) – a deceleration from the 0.4% m/m gain recorded in November. Compared to December 2021, wage growth was up 4.6% (down from 4.8% y/y in November). Aggregate hours worked rose by 0.2% m/m.

Key Implications

After oscillating in a very narrow range of 256k-269k in recent months, the pace of hiring took a modest step lower in December. Based on a three-month moving average, employment growth has slowed by over 125k jobs per-month since the Fed began rapidly tightening monetary policy last May but continues to run at a pace well above population growth.

Average hourly earnings cooled in December, but at 4.6% y/y, remains far too hot. Wage growth has been identified by the Federal Reserve as the primary source fueling higher inflation across many of the labor-intensive service sectors. Labor demand has started to ease from last year's highs, but there are still 1.7 job openings for every person actively looking for work. With labor force growth showing little improvement this past year, labor demand will need to slow considerably more to restore balance in the labor market cool wage pressures.

While a New Year tends to usher in change, the Fed's commitment to restoring price stability remains steadfast. With at least another 50 basis points of tightening to come over the first half of this year and the FOMC expected to keep rates elevated through much of 2023, a broader slowdown in economic activity appears likely over the coming months.

Daily Pivots: (S1) 132.06; (P) 133.06; (R1) 134.42; More...

Immediate focus remains on 134.49 resistance in USD/JPY. Considering bullish convergence condition in 4 hour MACD, firm break of 134.49 should confirm short term bottoming. Bias will be turned back to the upside for 138.16 cluster resistance (38.2% retracement of 151.93 to 129.49 at 138.06. On the downside, break of 129.49 will resume the whole decline from 151.93 instead.

In the bigger picture, a medium term top was in place at 151.93. Sustained trading below 55 week EMA (now at 131.65) would raise the chance of bearish trend reversal. Deeper fall would be seen to 61.8% retracement of 102.58 to 151.93 at 121.43. This will now remain the favored case as long as 55 day EMA (now at 137.26) holds.