January 10, 2022

“US Non-Farm Payrolls disappointed the dollar bulls, rising by 199,000 in December against expectations of a 400,000 increase, but wage surprise kept the Fed hawks alive. Eurozone inflation hit a post-pandemic high, as ECB policymakers worry about energy prices.”

Tim Hallinan, Trading Director

Main Headlines

Prominent economists from both sides of the political spectrum argued that the Fed is behind the curve in the battle to contain an outburst of inflation in an economy still beset by a pandemic. And while they generally welcomed the Fed’s pivot toward a tighter monetary stance and expect price pressures to ease this year, they sounded doubtful that inflation will decelerate as much as central bankers are forecasting. They saw it remaining well above monetary policy makers’ 2% target. Fed Chair Jerome Powell is likely to be pressed about what he intends to do to stem inflation when he appears Tuesday before the Senate Banking Committee for a hearing on his nomination by President Joe Biden for another four-year term. Goldman Sachs now sees the Fed raising rates four times this year and starting its balance sheet runoff process in July, if not earlier.

Manufacturers have warned that Brexit will add to soaring costs facing British industry, amid concerns that customs delays and red tape will rank among the biggest challenges for firms this year. Make UK, the industry body representing 20,000 manufacturing firms of all sizes from across the country, said that while optimism among its members had grown, it was being undermined by the after-effects of the UK’s departure from the EU. According to analysis of leading business surveys by an accountancy firm, and the Centre for Economics and Business Research, business optimism and output growth fell in December as firms grappled with the fallout from the latest wave of Covid infections.

GBP

Sterling is stronger against the euro and weaker against the dollar this morning. A third of the Tory membership now think Mr Johnson should stand down as Tory leader. Almost four in 10 say they think he is doing a bad job. Findings mark a substantial increase in disaffection amongst members of the Conservative Party compared to the early stage of the pandemic. Foreign Secretary Liz Truss says she will not accept a deal which means goods from Britain being checked as they enter Northern Ireland. Small businesses in the UK are sounding the alarm about spiralling energy costs at a time when many of them are still grappling with the pandemic. UK manufacturers are positive on the outlook for the market in 2022, though the optimism is tempered by difficulties in accessing labour and increasing input cost. Around three quarters of such companies expect conditions to improve in the new year, with 73% now believing the opportunities ahead for their business outweigh the risks.

EUR

The euro is weaker than most major currencies in the early morning trade. There are rising concern among some big European nations about economic consequences raising the risk of a split with the US on how strongly to hit Russia with sanctions if it invades Ukraine. European nations also worry that Russia would probably retaliate, possibly even cutting crucial gas supplies to a continent already dealing with record high energy prices. Denmark’s inflation rate fell for the first time in five months, pulled down by lower prices for gasoline and butter. Consumer prices rose 3.1% in December from a year earlier, down from a rate of 3.4% a month before, Statistics Denmark said in a statement on Monday. Electricity prices had a net positive effect on inflation in December and was the biggest factor on consumer prices over the whole of 2021, with a 32.1% increase.

USD

The dollar is well bid against most major currencies overnight. Current inflation is now above 6%, a level not seen in nearly 40 years, and is proving far more persistent than the Fed policymakers expected. At the start of 2022 most measures show the U.S. economy is booming, with an unemployment rate that is approaching record lows and a demand for goods that has imports from the rest of the world surging. On Friday, the Labour Department announced that the unemployment rate had fallen to 3.9% in December, even as the economy produced a smaller-than-expected increase of 199,000 new jobs. The report came a day after the Commerce Department announced that U.S. imports in November had increased by 4.6% over the previous month to $304.4 billion.

Markets

Stocks in Asia nudged higher Monday as investors brace for bond-market volatility and stimulus withdrawal. The dollar rose. Treasury yields climbed, after advancing across the board last week in a selloff sparked by Federal Reserve minutes signalling a willingness to start hiking rates as soon as March. US inflation data this week will be keenly watched as concerns grow the Fed is behind the curve in tackling elevated price pressures. US employers added fewer staff than expected in December, but wages rose more than forecast, boosting the Fed’s case to tighten liquidity. Markets face increasing volatility as investors grapple with how to reprice assets as the pandemic liquidity that helped drive equities to record highs is withdrawn. At the same time, the spread of omicron is posing a fresh test for economic activity.

Main Economic Data/ Central Banks/ Government (All Times CET)

8:00a.m.: Norway, Denmark Dec. CPI
9:30 a.m.: Sweden Nov. industrial orders, GDP indicator
10:00 a.m.: Italy Nov. unemployment
11:00 a.m.: Euro-area Nov. jobless rate
11:30 a.m.: Germany to sell bills
2:50 p.m.: France to sell bills

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