Non-Farm Payrolls Exceed Expectations, How Long Will the Dollar Retracement Last?

U.S. 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 U.S. 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 U.S. jobs data which certainly got Mr Powell to scratch his head.

More, and better paid jobs fueled U.S. 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,

U.S. equities fell and the dollar gained.

But then, the S&P500, which gapped lower at the open closed the session almost flat, and the U.S. 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.

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 U.S. 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.

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.

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

As such, the U.S. 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 U.S. 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.

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.

The dollar index is now trading 8% off its early November high, and it can't be excluded that a busy couple of weeks before the festive period will continue to put some pressure on the greenback, which is incidentally seasonally weak in December. This is, however, not our base case, as we suspect instead that the dollar correction may have run its course, and several factors should allow for some re-appreciation into year-end.

· First, markets have speculated about a dovish pivot from the Federal Reserve after signs of slowing inflation, but our suspicion is that the Fed will maintain its hawkish narrative for longer, implicitly or explicitly protesting against the recent drop in yields. Strong jobs numbers on Friday should offer a basis for this. After all, endorsing the market's dovish narrative may be premature and risky for the Fed whose plan should be to let markets do the heavy lifting in tightening - and our rates team is bearish on Treasuries in the near term. A still highly inflationary global environment may struggle to live with sub-3.50% 10-year yields.

· Secondly, USD/CNY is trading below 7.00 for the first time since September, with the yuan following Chinese risk assets higher after the government announced an easing of Covid rules. The government's move appears to be a direct consequence of recent demonstrations against its Covid policy, but a further untightening of restrictions may prove complicated. Many parts of the country – including Beijing – are facing a surge in cases, and the vaccination rates (especially booster doses) among the elderly still look insufficient. At the same time, the real estate and export sectors remain a key concern for the medium outlook in China, and one that may prevent the yuan from appreciating much further.

· Third, with Russia rejecting the cap on oil prices at $60/bbl and threatening output cuts, along with a projected drop in temperatures in many parts of Europe, the energy crisis may return and we see ample room for gas and oil prices to climb back. That would be a positive development for the dollar.

Today, the US calendar includes ISM service figures for November, while PPI and University of Michigan survey numbers are the other major releases to watch this week. There are no Fed speakers as the pre-FOMC blackout period has now started.

According to our calculations based on CFTC data, the dollar's aggregate positioning against G10 currencies is now neutral, and at the lowest levels since August 2021. With more limited room for position-squaring effects to weigh on the dollar, our view for this week is that we could see at least some stabilisation in the greenback. DXY may struggle to extend its drop below 103/103.50, and a rebound to 105.50/106.00 looks more likely in our view.

The eurozone's calendar lacks market-moving data this week, and only includes some final releases (GDP, PMIs). However, we'll get a chance to hear the last few comments by European Central Bank officials before the 15 December policy meeting. Markets appear to have reinforced their 50bp expectations over 75bp, especially after the latest deceleration in eurozone inflation which makes the hawkish rhetoric harder to defend.

However, energy-related news should be more relevant for the euro this week, with falling temperatures in Europe and the price cap on Russian oil coming into effect today. Urals grade crude is trading around $10 below the $60/bbl cap, but Russia has already announced that it would prefer to trim production rather than sell at the embargo price. OPEC+ has held production steady and is only scheduled to meet again in February, but we continue to see risks that a tighter picture in the energy market in 2023 could lead to higher oil and gas sooner rather than later. Given the high sensitivity of EUR/USD to the eurozone's terms of trade (which is primarily driven by energy prices), further upside risks for energy commodities equal downside risks for the euro.

This week, some dollar stabilisation could make the EUR/USD rally run out of steam around the 1.0600/1.0650 area, and possibly lead to a more sustainable drop below 1.0450/1.0500. We remain bearish on the pair into year-end.

Markets have aligned their expectations for the Fed, the ECB and Bank of England's December rate hikes at 50bp. There is only a residual 7bp of extra tightening in the OIS curve for the 15 December BoE meeting, and our call is also for a half-point move.

Rate expectations are unlikely to be stirred this week given the BoE has entered its quiet period and there are no major data releases in the UK.

We struggle to see cable extend its rally to 1.25 and beyond, but it will undoubtedly be primarily a dollar/risk sentiment story driving the pair before the BoE meeting. A contraction below 1.20 seems more appropriate given global and UK macro fundamentals.

This week will kick off with the release of wage growth in the Czech Republic, a key number for the Czech National Bank given that a wage-inflation spiral is a major risk for the board. The central bank forecasts 6.1% in nominal terms; we expect a number closer to 8.0% year-on-year. However, we don't believe this will be enough to trigger a hawkish reaction. On Tuesday, EU finance ministers may vote on a European Commission proposal to freeze Hungary's access to EU funds. On Wednesday, we will see industrial production results in the Czech Republic and Hungary where we expect to see slowing but still solid numbers. In Romania, a breakdown of 3Q GDP will be published and later we will see the National Bank of Poland's decision. After the publication of inflation last week, which surprised to the downside, we can expect nothing but a confirmation of the end of the hiking cycle. Then on Thursday, November inflation in Hungary will be published. We expect a further jump in YoY numbers from 21.1% to 22.4% and a similar jump in core inflation, in line with market expectations.

In the FX market, the CEE region remains well supported by the external environment, despite our expectations, especially thanks to the weak US dollar, which remains a question mark for this week. At the local level, the main themes remain the same: Hungarian forint and Polish zloty.

In Hungary, FX remains mainly driven by the EU story and we should see new headlines this week. However, the markets are visibly losing patience, resulting in high volatility, which we expect this week as well. Positioning in our view became more balanced last week, creating room for a new rally if we hear positive news, which is our baseline. In this case, we expect the forint to return below 405 EUR/HUF.

In Poland, the main topic will of course be the NBP's meeting, which will again test the market's willingness to accept the decision to end the hiking cycle. The massive rally in rates and POLGBs last week following the release of inflation data further widened the gap between the zloty and interest rate differential. FX thus remains vulnerable, in our view. We remain bearish with expectations for the zloty to return above 4.72 EUR/PLN.

Recently, the top of inflation ignited the expectation of a Fed's turn, with the market widely expecting a slowdown of the Fed's rate hike to 50 basis points in December. Thus, the USD fell sharply and was continuing to weaken, while gold prices tended to strengthen. At the same time, the risk of global recession is still rising, and seasonal physical demand picks up at the end of the year, providing good support for gold.

However, the US Nonfarm Payrolls data released last week was positive, with employment increasing by 263,000 in November, exceeding forecasts for an increase of 200,000. As the labor force participation rate fell, the unemployment rate remained at 3.7%, indicating that the labor market remains strong. In addition, the most eye-catching is undoubtedly the average hourly earnings rose 0.6% MoM, or 5.1% YoY, payroll inflation exacerbated the wage-price spiral, suggesting that the Fed's anti-inflationary road is still a long way to go, which once curtailed part of gold's rally.

Nonetheless, Fed official Evans reiterated later that slowing the pace of rate hikes is just a change in market pricing of the Fed's terminal rate, with a high probability of interest rates peaking above 5%. Coupled with the fact that most central banks around the world are still raising interest rates, making gold bulls apprehensive, gold prices are expected to hover around the current 1800 level for a while. Gold prices will not be higher until new catalysts are available.

The 'blackout period' before the Fed's interest rate meeting starts this week. The Market will be hesitating due to the absence of further political signals from the Fed. For sure, there will be a series of significant economic data during the week, such as the U.S. November ISM non-manufacturing PMI and November PPI, while November PPI is expected to slow down again in November to provide more evidence of cooling inflation and support the rebound for gold. Moreover, initial and renewal jobless claims also need attentions since sufficient cooling signals are missing at present.

Regarding the technical graphics, gold prices rose sharply last week to $1800, and the bullish signal was further enhanced in the completion of the step-back on the key position near 1780. Besides, short-term gold prices are suppressed by the Nonfarm Payrolls performance, which will oscillate before the resistance near 1807. If the resistance level is broken above, gold prices will proceed to the range of $1840-$1870. For retracement, the support near 1800 and 1780 should be considered.

Last week, the manufacturing PMI of Europe, the US, China, and other major economies in the world's are underperforming and below the threshold, reflecting greater risks of global economic recession, while demand concerns have always weighed on oil prices. However, the recent strict pandemic prevention and control policies of major Asian countries have loosened and become a key factor dominating the international oil market soon. Besides, oil prices are benefited significantly as demand expectations are improved and market risk appetite is recovered significantly.

On the supply side, EU members state reached an agreement on Friday to set a price cap on Russian seaborne crude oil exports, with the G7 and Australia following suit. Russia warned that the move would jeopardize energy security, and Russia would not supply oil and petroleum products to countries imposing price limits on Russian oil, a countermeasure that could exacerbate the tight supply situation in the crude oil market, favoring oil prices. Nevertheless, the OPEC+ plans to keep production cuts unchanged, and the U.S. strategic reserve oil placement are ending, all putting pressure on the supply side of oil.

In addition, the Fed is likely to slow down interest rate hikes in December, and the USD is weakened continuously. Moreover, US crude oil inventories dropped. All good news will boost oil price higher.

In the near term, investors still need to pay special attention to the global pandemic and the situation in Russia and Ukraine. As the Asian pandemic prevention and control policy no longer appears to be a major recurrence, the upward trend of oil prices will maintain. Furthermore, many essential economic data from Europe and the US will be available this week, any hint of economic deterioration may trigger more demand concerns, thus limiting the rise in oil prices.

Based on the technical graphs, WTI kept the downtrend with fluctuations. It bottomed out and rebounded last week and keep the key support of 76.0 successfully. Additionally, WTI formed a double bottom structure in the daily chart, tending to rebound with oscillation soon with limited retracement space, and the closest support below is near 79.0. Referring to the upside, the resistance near 82.0 should be focused on, bulls will rebound and take a step upward only after WTI breaks above the key resistance of 85.0.

Speculators cleaving to the view that the crypto rout is mostly over are at risk of a rude awakening in 2023, according to Standard Chartered.

A further Bitcoin plunge of about 70% to US$5,000 next year is among the "surprise" scenarios that markets may be "under-pricing," the bank's Global Head of Research Eric Robertsen wrote in a note on Sunday.

Demand could switch from Bitcoin as a digital version of gold to the real thing, spurring to a 30% rally in the yellow metal, Robertsen also said.

This possible outcome involves a reversal in interest-rate hikes as economies struggle and more crypto "bankruptcies and a collapse in investor confidence in digital assets," Robertsen added.

He stressed that he wasn't making predictions but instead adumbrating scenarios that are materially outside of current market consensus.

The question of just what lies ahead for digital assets has arguably never been harder to answer following the collapse of Sam Bankman-Fried's FTX exchange and sister trading house Alameda Research. The tremors spreading from the blowup threaten to topple more crypto companies and buffet token prices.

For some, much of the bad news may already be reflected in a more than 60% plunge in Bitcoin and a gauge of the top 100 tokens over the past year.

"Our base case is that most forced selling is over, but investors might not be compensated for the market risk incurred in the immediate term," Sean Farrell, head of digital asset strategy at Fundstrat, wrote in a note Friday.

Farrell pointed to ongoing uncertainty surrounding Digital Currency Group, parent company of embattled crypto brokerage Genesis. Creditors to Genesis are seeking options to try to keep the brokerage from falling into bankruptcy.

"Gold will benefit going forward from the problems in crypto, with the sudden decline in confidence in the crypto ecosystem," said Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney.

The crypto sector continues to retrench. For example, digital-asset exchange Bybit is planning to cut its workforce by 30%, the latest in a slew of layoffs to hit the industry.

More pain may lie ahead: some 94% of respondents to Bloomberg's MLIV Pulse survey think that further blowups will follow the bankruptcy of FTX as years of easy credit give way to a tougher business and market environment.

Bitcoin for the moment is fairly steady. The largest virtual coin rose as much as 1.8% on Monday and was trading at a three-week high of about $17,340 as of 2:35 p.m. in Tokyo. Tokens such as Ether, Solana and Polkadot also gained.

While there has been little wider fallout from this week's surge in redemption requests at an unlisted Blackstone real estate income trust (REIT), it is being read by some as a warning sign.

Blackstone limited withdrawals from its $69 billion unlisted REIT on Thursday after redemption requests hit pre-set limits amid investor concerns it was slow to adjust valuations as interest rates surged, a source close to the fund said.

The development is yet another reminder of the risks facing not just sectors that are sensitive to higher interest rates but also broader financial markets, which have rallied sharply on hopes that interest rate hikes will slow.

"We have to be careful - rates have risen sharply and there will be a fallout for some asset classes," Seema Shah, chief strategist at $500 billion asset manager Principal Global Investors, said of the potential pitfalls ahead.

"REITS had a fantastic performance for a couple of months but when you have that outperformance, investors don't react to traditional fundamental signals such as rising rates," she said.

Blackstone's shares were down around 0.2% on Friday afternoon after falling 7.1% on Thursday.

Big developed economies have raised rates by a combined 2,440 basis points in this monetary tightening cycle to date. This excludes Japan, which has kept rates at -0.1%.

The U.S. Federal Reserve has raised its policy rate by 375 basis points this year to a 3.75%-4.00% range in the fastest rate-hiking cycle since the 1980s in its inflation fight.

But in recent weeks expectations have risen that the Fed will "pivot" from aggressive tightening, prompting investors to price in lower peak interest rates.

That helped spark the biggest monthly drop in 10-year Treasury yields since the height of the COVID-19 pandemic in 2020. Public REITS have rallied with the U.S. stock market, which is up over 15% since mid-October.

"As long as you have complacency, and there is some complacency that the Fed can engineer a soft landing, that can trigger some pain and so events like this are small flag posts for the ramifications of progressive rising rates," Shah said.

Investors said they expected further declines in REITs and the property sector.

"The fact is that most retail investors, and defined benefit scheme investors due to de-risking strategies, are electing to reduce their real estate holdings across the board where they can as values in direct real estate reprice alongside rates normalisation," said Chris Taylor, chief executive of real estate at Federated Hermes.

But there is a broader caveat for markets seeing their fair share of warnings this year from bets placed in a low-rates era.

Crucially, September's mini-budget of unfunded tax cuts sent Britain's bond market into a tailspin as pension funds faced huge collateral calls on interest rate hedges that had never been truly tested by sharp moves in rates, prompting a Bank of England intervention.

And as the mini-budget briefly triggered a ratcheting up in BoE rate-rise bets, UK REITS fell 17% to their lowest level since 2012, before recovering.

Kaspar Hense, a portfolio manager at BlueBay Asset Management, which manages assets worth more than $92 billion, said the REIT news was an example of the risks private markets face in a rising rates environment.

"If yields are rising, being invested in rather illiquid assets can be a challenge, just for a rather small (return) pick-up going into illiquid markets, which will suffer very significantly if yields are rising," Hense said.

"That is certainly what we're seeing here and we should really expect to happen again over the next six to 12 months as yields are rising and central banks are keeping rates higher. It will have an impact on net worth, it will have an impact on investors' losses," Hense added.

Blackstone has reported a 9.3% year-to-date net return for the REIT, while the publicly traded Dow Jones U.S. Select REIT Total Return Index has slumped over 22% over the same period.

A Blackstone spokesperson declined to comment on how the New York-based firm calculates the valuation of its REIT, but said its portfolio was concentrated in rental housing and logistics in the southern and western United States that have short duration leases and rents outpacing inflation.

At least one analyst, Morgan Stanley's Michael Cyprys, said the market's reaction to the news was "overdone."

While limitations on redemption requests, year-end tax planning decisions and investor reallocations could spur more redemptions in the near-term, a “strong performance track record, supportive market fundamentals, and scope for an improved macro backdrop should help alleviate potential outflow pressure,” he wrote in a research report.

Others were less sanguine. One concern is the potential for big differences between the valuation of public assets and private assets, which are often not priced to reflect movements in public markets.

For investors who piled into private markets and riskier assets in a bid to boost returns during years of low rates and easy cash, this could now prove even riskier.

"The prolonged period of very cheap money and abundant liquidity encouraged some asset managers to offer relatively liquid products that invest in relatively illiquid assets. These products behave differently in a world of patchy liquidity," Mohamed El-Erian, an advisor to Allianz, said in a Twitter post.

The OPEC+ meeting yesterday was a fairly quick affair with the group deciding to leave output policy unchanged. As a result, the group will continue with its cuts of a little over 1MMbbls/d which were announced back in October. OPEC+ will next meet in June, although given the amount of uncertainty, one cannot rule out the potential need of calling for a meeting in the interim.

EU members finally agreed on a level for the Russian oil price cap at the end of last week. The EU agreed on a cap of US$60/bbl, which is below the initial proposal of US$65-70/bbl. However, the cap is still above what Russia will be receiving for its Urals, which calls into question how effective the cap will be at the moment. The price cap comes into force today, along with the EU's ban on Russian crude oil. The level of the cap suggests that we are unlikely to see Russia reducing output as a result.

Despite no change in OPEC+ policy and the high level of the price cap, oil prices have been well supported so far in trading today. A further relaxation in China's Covid restrictions has proven supportive for the market.

The latest market positioning data shows that speculators continued to reduce their net long in ICE Brent over the last reporting week. Speculators reduced their net long by 38,837 lots to leave them with a net long of 99,211 lots as of last Tuesday. This is the smallest net long speculators have held since November 2020 and reflects growing demand concerns.

Copper has continued its rally today after the latest move by Chinese authorities, which sees an easing Covid in testing requirements across major cities. Meanwhile, recent efforts by the Chinese government to revive its property sector have also supported the metals complex.

The latest data from Shanghai Futures Exchange (ShFE) shows that weekly inventories for zinc dropped by 2.5kt (-12% WoW) to 17.9kt (fresh record lows) as of Friday. Among other metals, aluminium stocks fell by 14.5kt (-13% WoW) for a seventh consecutive week to 95.5kt (lowest since 2016) as of last week.

According to reports, IGO has suspended production at its Nova nickel operation in Western Australia after a fire damaged its power station over the weekend. The company expects that the restoration of full power supply could take up to four weeks. Nova produced 26.7kt of nickel in the last financial year.

The latest data from Ukraine's Agriculture Ministry shows that Ukraine has exported around 18.1mt of grains so far in the 2022/23 season, a decline of 30% from the same period last year. Total corn shipments stood at 9.7mt (+63% YoY), while wheat exports fell 53% year-on-year to 6.9mt as of 2 December.

Data from the Indian Sugar Mills Association (ISMA) shows that domestic sugar production rose 1.5% YoY to 4.79mt (until 30 November) in the current 2022/23 marketing year. ISMA also reported that 434 mills were crushing sugar cane by the end of last month compared with 416 operating mills a year earlier.