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The reaction to Friday’s strong payrolls report is telling. Net job growth beat consensus at 263k with average hourly earnings growth accelerating to 0.6% M/M and 5.1% Y/Y. The unemployment rate stabilized at 3.7%, though a lower participation rate helped. The payrolls confirm the still red hot US labour market and seemed to serve as the perfect excuse to stop current corrections on bond/FX/stock markets going into the final Fed policy meeting of the year. In a first reaction, this all played out: the dollar firmed, the US yield curve turned more inverse with Treasuries falling and main US indices opening almost 2% lower. Strange enough, these Pavlov-moves didn’t gain traction. On the contrary, by the end of US dealings, most of them were almost completely erased. It all suggests strong market comfort regarding a Fed policy moderation, especially since last Wednesday’s speech by FOMC Chair Powell. This tide probably won’t change until that December 14 Fed meeting, with the only big data point remaining being next Tuesday’s November CPI readings. While the Fed will shrink the magnitude of its rate hike from 75 bps to 50 bps, markets remain very complacent about Fed speak about a higher peak policy rate peak and vowing against rate cuts in 2023. Perhaps the new FOMC dot plot might open some eyes.

US yield changes eventually ranged between +4.2 bps (2-yr) and -5.1 bps (30-yr). The US 10-yr yield is currently testing the June top at 3.5% with 50% retracement on the Aug/Oct move higher luring at 3.42%. Changes on the German curve varied between +8.6 bps (2-yr) and -2.9 bps (30-yr) by the European closing bell, but these don’t (completely) take into account the US market-reversal. The German 10-yr yield is at risk of losing 1.77%/1.82% support at the open this morning (October low/38% retracement on Aug/Oct move higher). The trade-weighted dollar spiked from 104.50 to 105.50 after payrolls, before returning this gain and sliding towards 104 this morning in a positive Asian risk climate. EUR/USD went from 1.0540 towards 1.0430 and currently changes hands near 1.0575. Next technical marks are 1.0747 (62% retracement on this year’s slide) and 1.0806 (March low). Main US stock markets closed unchanged. 

This morning’s risk vibe is related to looser Chinese Covid-rules with Shanghai for example scrapping PCF testing requirements to enter outdoor public venues. Measures will continue to be optimized and adjusted. Local stock markets gain up to 4% for Hong Kong while the Chinese yuan surges below USD/CNY 7 for the first time since September as CNY strength meets USD weakness. Today’s eco calendar contains US non-manufacturing ISM, but we don’t think it will be of any relevance.

News Headline

S&P changed the outlook on the French AA rating from stable to negative as it sees rising risks to the country’s public finances and the resulting reduction in fiscal space. France already has a large general government debt which faces implementation risk associated with the country’s structural reform agenda, an economic slowdown and the ECB’s monetary tightening. S&P could lower the rating if general government debt to GDP doesn’t decline over the 2023-25 period. It reduced the 2023 growth outlook to 0.2% from 1.7% while 2023 the budget deficit is expected at 5.4% of GDP. With the deficit expected to average 4.9% in 2023-25 period, government debt is expected to rise to 112% of GDP. At the same time, Moody’s kept the outlook on its French Aa2 rating unchanged at stable as the agency sees the risks to France’s credit profile as balanced. It assesses France as a wealthy and diversified economy. The country has strong debt affordability in spite of an elevated debt level, according to Moody’s.

The Confederation of British Industry (CBI) substantially downgraded its forecast of the UK economy. CBI now expects the economy to contract 0.4% next year due to high inflation and as companies scale back investments. CBI also doesn’t expect activity (GDP) to return to a pre-Covid level before mid-2024. Unemployment is expected to rise to 5.0% end 2023/early 2024. Inflation is only expected to ease slowly. Inflation printed at 11.1% in October this year. CBI expects average price growth of 6.7% next year and 2.9% in 2024. Business investment at the end of 2024 is still seen 9% below its pre-pandemic level and output per worker 2% lower.

US stocks fell on Friday, after the latest data showed that Americans got more jobs in November, and more importantly they got a better pay. Wages grew by 0.6% over the month, which was the biggest monthly gain, and the double of what was penciled on by analysts.

Of course, the news was great for the American workers, but much less so for the Federal Reserve (Fed), who is dreaming of a softer US labour market, and weak wages so that people could just STOP spending in hope that inflation would fall.

But nope, it’s just another month of strong US jobs data which certainly got Mr Powell to scratch his head.

Investors just… don’t want to price Fed rate at 5%

More, and better paid jobs fueled US inflation expectations, boosted the Fed hawks, and brought forward the idea that the Fed could be attracted by another, a fifth 75bp hike in the December meeting,

US equities fell and the dollar gained.

But then, the S&P500, which gapped lower at the open closed the session almost flat, and the US dollar index gave back all post-jobs gains to close the week where it was before data, and even came lower in Asia this morning.

Why?  

Probably because investors priced in the fact that the Fed won’t increase its rates by 75bp this month. It will probably increase them by more in the first half of next year. But that information doesn’t go through for some reason, and the pricing for the Fed’s terminal rate is still below 5%.

So be careful, even though the rally in equities looks like it could continue, and the weakness in the US dollar is what could mark the last weeks of a chaotic trading year, we will certainly see these forces reverse in the first weeks of January, if not before.

S&P 500 at crossroads 

The S&P500 closed what was normally supposed to be a week of losses with gains. The index added more than 1% last week, and closed the week right at the top of the year-to-date descending channel, and above its 200-DMA.

The RSI index doesn’t point at overbought conditions, the MACD index is slightly positive, and the volatility index slipped below 19, low volatility being a sign of improving risk appetite, and potentially sustainable gains.

Is there a possibility for this rally to extend despite all the red flags? Yes! There is, though, with the risk of Jerome Powell sounding like at the Jackson Hole speech back in summer – which had destroyed the market mood in a couple of minutes.

The next big data is due next week, on Tuesday, a day before the FOMC decision. Until then, investors could give themselves the luxury to dream about a dovish future.

The freefalling dollar 

Until then, we could see the US dollar lose more field against most majors, if we are lucky enough. The EURUSD for example gained more than 10% since the end of September, as Cable gained nearly 20% since the Liz Truss dip.

As such, the US dollar rebound seems a bit aggressive, especially knowing that the market has been refusing to price in a terminal rate for the Fed above 5%.

So, there is a risk that we don’t see a one-sided dollar selloff when the Fed remains sufficiently hawkish – and when the market pricing will have to match the Fed talk at some point.

But the latest dollar selloff is a hint that the US dollar has certainly peaked this year, and next year will be, despite some Fed hawkishness, and some rebounds, a year of softening for the greenback and recovery for other currencies.

OPEC doesn’t cut output 

The weekend was rather eventless, as OPEC decided to maintain its daily output restriction unchanged at 2mio barrels per day at Sunday’s meeting, which could be seen as a negative development for the bulls.

But there are two price-supportive developments that could limit losses below the $80pb.

First, Europeans finally agreed on the Russian oil price cap at $60pb, that Russia refused – hinting that the Russians could reduce their oil output in the coming months, which would than reduce the global supply and push prices higher.

Second, China is easing Covid measures. The Chinese reopening could counter the global recession odds and support oil prices.

In US crude, strong resistance is seen at $85pb, 50-DMA.

Market movers today

This week will be quiet in terms of key data releases as markets await the final ECB and Fed meetings of the year on 14 and 15 December.

In euro area, October retail sales will be released today, but focus will mostly remain on final ECB comments ahead of the blackout period starting on Thursday.

Following Friday's strong US jobs report, today we will get the ISM services index. It will be interesting to see if private consumption has truly cracked in November after PMIs signalled clearly weakening growth earlier.

Later in the week, we have the Reserve Bank of Australia meeting on Tuesday, where we expect a 25bp hike.

The 60 second overview

US job report: The US jobs report on Friday was quite strong with 263k jobs created in November compared to 200k expected and a revised 284k in October. Wage growth also edged higher once again rising 0.6% m/m or 5.1% y/y. That said, the less important household survey was weaker. Hence, the unemployment rate was unchanged 3.7%. We also note that the participation rate declined even further indicating a growing labour shortage as reflected in the higher wage growth. Employment gains were broad-based across sectors, so overall a strong report that underlines that the Fed has more work to do. Hence, the verdict is still out whether the Fed will hike 50bp or 75bp next week though the recent Powell comments do point towards 'a small' 50bp hike. The market is pricing some 55bp hike next week.

Initially, yields and the USD dollar rose on the numbers though the moves reversed as the markets took its direction from the somewhat weaker household survey.

Oil market: During the weekend the EU and later G7 presented its USD 60 a barrel price cap on Russian oil. The ceiling indicates the maximum price that shipping companies that want insurance or financing in the EU or Great Britain are allowed to pay for Russian oil. The ceiling came into effect by midnight at the same time as it became prohibited to import seaborne Russian oil into the EU. The ceiling therefore concerns Russian oil to third countries such as China, India and Turkey. The cap remains significantly above what much of Russian oil is sold for today underlining that the G7 was not ready to introduce a cap that could significantly hamper Russian oil export. As expected, OPEC+ kept production quotas unchanged at the meeting yesterday. We should expect a volatile week in global oil markets as the impact of the price cap is evaluated. But the oil market will probably quickly return its' focus to the demand side with focus on a possible Chinese reopening and the important policy meetings next week being the main drivers. Brent initially opened up 1.5 USD higher this morning but hA eased somewhat now.

China: Media reports that testing requirements have been eased in Shanghai, which is seen as yet another sign that China is moving towards an easing of its zero-Covid policy. If these changes are seen in other Chinese cities it should boost market optimism this week.

ECB: Yesterday, French ECB member Villeroy said he favours a 50bp hike when the ECB meets next week.

Equities: Performance briefly reversed on Friday as yields surged on the jobs report, bringing equities lower and high multiple stocks too. Yet, within moments S&P recouped its losses to -0.1% as yields dropped back and suddenly tech underperformed just mildly. Similarly, Nordic quality (NIBE, Atlas) even outperformed banks on Friday. So, good week for stocks overall. Nasdaq is up 4% within a week and MSCI Nordics 1.5%. Our preferred sectors real estate, communications and healthcare have beat the index superiorly.

FI: The stronger than expected US labour market report on Friday supported the expectations for a continued tightening of US monetary policy. The initial reaction to the labour market report was a solid sell-off in the global bond markets. However, the sell-off was short-lived and US Treasuries ended lower at the end of the day.

FX: Brief bounce in broad USD on Friday on the back of the US jobs report that sent EUR/USD temporarily down to 1.04 and USD/JPY close to 136. Oil market took the news of EU agreeing to price cap on Russian oil exports with relative calm.

Credit: A relatively quiet day both on the primary and secondary sides concluded the week. ITraxx main was unchanged at 88bp while Xover was unchanged at 443bp.

Nordic macro

Sweden: The Riksbank is publishing the minutes from the monetary policy meeting where markets will look for signs of a possible pivot towards smaller repo rate increases going forward. Swedish service PMI numbers likely to reach new lows after last month's slight uptick.

Daily Pivots: (S1) 1.0466; (P) 1.0505; (R1) 1.0583; More...

Intraday bias in EUR/USD remains on the upside at this point. Rise from 0.9534 should target 1.0609 fibonacci level. Further rally is expected as long as 1.0289 support holds, in case of retreat. However, firm break of 1.0289 support will confirm short term topping and bring deeper decline back to 1.0092 resistance turned support.

In the bigger picture, a medium term bottom was in place at 0.9534, on bullish convergence condition in daily MACD. Even as a corrective rise, rally from 0.9534 should target 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Sustained trading above 55 week EMA (now at 1.0566) will raise the chance of trend reversal and target 61.8% retracement at 1.1273. However, rejection by 1.0609 will retain medium term bearishness for down trend resumption at a later stage.

Daily Pivots: (S1) 1.2187; (P) 1.2243; (R1) 1.2352; More...

Intraday bias in GBP/USD stays on the upside at this point. Current rally form 1.0351 should target 1.2759 medium term fibonacci level next. On the downside,e break of 1.1898 support is needed to indicate short term topping. Otherwise, outlook will stay bullish in case of retreat.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Daily Pivots: (S1) 0.9317; (P) 0.9378; (R1) 0.9430; More...

Intraday bias in USD/CHF stays on the downside as fall from 1.0146 is in progress. Next target is 61.8% projection of 1.0146 to 0.9355 from 0.9545 at 0.9056. On the upside, however, break of 0.9545 will indicate short term bottoming, and turn bias back to the upside for stronger rebound.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 might be a medium term down trend itself. Break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 55 day EMA (now at 0.9690) holds.

Daily Pivots: (S1) 133.33; (P) 134.65; (R1) 135.67; More...

Intraday bias in USD/JPY stays on the downside. Fall form 151.93 is in progress for for 133.07 medium term fibonacci level or further to 55 week EMA. On the upside, break of 137.66 support turned resistance will turn intraday bias neutral first. However, near term risk will stay on the downside as long as 142.24 resistance holds, even in case of recovery.

In the bigger picture, a medium term top should be formed at 151.93. Fall from there is correcting larger up trend from 102.58. It's too early to call for bearish trend reversal. But even as a corrective move, such decline should target 38.2% retracement of 102.58 to 151.93 at 133.07, or further to 55 week EMA (now at 131.33). Some support should be seen around this zone to bring rebound. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

Daily Pivots: (S1) 1.3424; (P) 1.3472; (R1) 1.3524; More....

Intraday bias in USD/CAD stays neutral at this point. On the upside, break of 1.3644 resistance will affirm the case that correction from 1.3976 has completed at 1.3224. Further rise should then be seen to 1.3807 resistance first. However, break of 1.3315 will resume the fall from 1.3976 through 1.3222 cluster support, which carries larger bearish implications.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

Daily Pivots: (S1) 0.6747; (P) 0.6791; (R1) 0.6840; More...

AUD/USD's rally is resuming and intraday bias is back on the upside for 0.6871 fibonacci level. For now, outlook will remain bullish as long as 0.6641 support holds, in case of retreat. However, break of 0.6641 will indicate rejection by 0.6871 and turn bias back to the downside instead.

In the bigger picture, a medium term bottom is in place at 0.6160 already. But it's too early to call for trend reversal. Nevertheless, even as a corrective move, rise from 0.6169 should target 38.2% retracement of 0.8006 to 0.6169 at 0.6871. Sustained trading above 55 week EMA (now at 0.6922) will raise the chance of the start of a bullish up trend. However, rejection by 0.6781 or 55 week EMA, followed by 0.6521 resistance turned support and retain medium term bearishness.

Dollar's selloff continues in Asian session today as overall market sentiment is supported by further restriction easing in China. The improvement in sentiment is also reflected in some weakness in Yen and Swiss Franc. Australian Dollar and Canadian Dollar are trading generally higher, awaiting rate hike by RBA and BoC later in the week. Euro and Sterling are mixed for now.

Technically, Gold is also extending the rise from 161.51. Next target is 61.8% projection of 1616.51 to 1786.83 from 1728.48 at 1833.73. Sustained break there could prompt acceleration to 100% projection at 1898.80, which is close to 1900 handle. If happens, that could be a confirming signal of Dollar's selloff, which might be accompanied by EUR/USD's firm break of 1.0609 fibonacci level.

In Asia, at the time of writing, Nikkei is down -0.03%. Hong Kong HSI is up 3.46%. China Shanghai SSE is up 1.56%. Singapore Strait Times is up 0.49%. Japan 10-year JBG yield is up 0.0026 at 0.254.

BoE Dhingra: Interest rate should peak below 4.5%

BoE MPC member Swati Dhingra said in an Observer interview that interest rate in the UK should peak below 4.5% to avoid deepening and prolonging a recession.

"You do see a much deeper and a longer recession with rates being much higher. That is what I think we should all be worried about … are we going to end up lengthening and deepening the recession if the tightening continues at the pace it is?" she said.

She added that those expecting more large rate hikes are not considering the fall in investment and employment as projected for the new two years. "These are not trivial numbers. The market has clearly not realized how pessimistic that could be for the UK economy," she said. "The economic slowdown is here."

ECB Villeroy backs 50bps hike this month to finish first half of the game

ECB Governing Council member Francois Villeroy de Galhau said in an interview on Sunday, for this month's meeting, "it's desirable to bring rates to 2%, so a rise of 0.5 or 50 basis points."

Bringing interest rate to 2% will market the first half of the game of normalization. "In the second half of the match, rates will continue to rise but I can't say where this will stop," adding the the pace would be slower.

He also noted it would be "wise to start to reduce (the balance sheet) in 2023, beginning with the APP holdings in the "first half of the year, clearly but cautiously and progressively."

China Caixin PMI services dropped to 46.7, third month of contraction

China Caixin PMI Services dropped from 48.4 to 46.7 in November, below expectation of 48.8. PMI Composite dropped from 48.3 to 47.0, signalling a third successive monthly contraction in business activity. The rate of decline was the strongest since May.

Wang Zhe, Senior Economist at Caixin Insight Group said: "Manufacturing and services activity contracted in varying degrees, with the services sector hit harder by Covid outbreaks.... The prolonged pandemic has battered the economy. While the third wave has led to a softened slowdown on both supply and demand than the previous ones, there has been significant pain in the job market."

RBA and BoC to continue tightening

Two central banks will meet this week. RBA is expected to hike by 25bps to 3.10%, maintaining a "consistent" pace. The statement should reflect that tightening bias is maintained for another hike in February. But beyond that, the path would depend on the new economic projections to be published in February.

BoC is also widely expected to deliver another rate hike. But with interest rate more in restrictive level at 3.75%, the central are having more options, and thus opinions are divided. The chances of a 25bps and 50bps are roughly equal. Another consideration is whether the pause in tightening would start after this week's action, or next. So, there is room for some surprises.

Here are some highlights for the week:

• Monday: Australia AiG construction, MI inflation gauge; China Caixin PMI services; Eurozone PMI services final, Sentix investor confidence, retail sales; UK PMI services final; Canada building permits; US ISM services, factory orders.
• Tuesday: Japan labor cash earnings, household spending; RBA rate decision, Australia current account; UK PMI construction; Canada trade balance; US trade balance.
• Wednesday: Australia AiG services, GDP; China trade balance; Japan leading indicators; Swiss unemployment rate, foreign currency reserves; Germany industrial production; France trade balance; Italy retail sales; Eurozone GDP revision; US non-farm productivity; BoC rate decision.
• Thursday: Japan bank lending, current account, GDP final; Australia trade balance; US jobless claims; Canada Ivey PMI.
• Friday: New Zealand manufacturing sales; Japan M2; China CPI, PPI; Canada capacity utilization; US PPI, U of Michigan consumer sentiment.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6747; (P) 0.6791; (R1) 0.6840; More...

AUD/USD's rally is resuming and intraday bias is back on the upside for 0.6871 fibonacci level. For now, outlook will remain bullish as long as 0.6641 support holds, in case of retreat. However, break of 0.6641 will indicate rejection by 0.6871 and turn bias back to the downside instead.

In the bigger picture, a medium term bottom is in place at 0.6160 already. But it's too early to call for trend reversal. Nevertheless, even as a corrective move, rise from 0.6169 should target 38.2% retracement of 0.8006 to 0.6169 at 0.6871. Sustained trading above 55 week EMA (now at 0.6922) will raise the chance of the start of a bullish up trend. However, rejection by 0.6781 or 55 week EMA, followed by 0.6521 resistance turned support and retain medium term bearishness.

Economic Indicators Update