Sage Investment Club

In case you missed the action on Friday:

The non-farm payrolls report solidified the narrative that the labour market remains strong and hopes for a soft landing was boosted. The initial reaction was mixed and volatile, with the dollar easing before catching a round of bids as some hints of risk aversion kicked in.

In some sense, the report sort of vindicates the Fed’s outlook to keep tightening further. Equities slumped as well afterwards but all of that changed once the ISM services report came out, which underwhelmed strongly. After all, labour market data is a lagging indicator.

The bond market was strongly bid afterwards and stocks soared as the dollar crumbled. The report points towards the possibility that the Fed may not be able to keep up its aggression and that is enough for markets to start running.

Looking at how things played out, I would argue that the balance of risks is leaning more in favour of those hunting for a Fed pivot rather than the other side at the moment. Especially since we have seen inflation numbers come down in the past few months.

This week, we will get another massive inflation report from the US. The headline reading for December is estimated to drop to 6.5% y/y, down from the 7.1% y/y reading in November. Meanwhile, the core reading is estimated to drop to 5.7% y/y, down from 6.0% previously.

If that plays out as expected, broader markets are in for a hot start to the new year surely. As for the dollar, it’s going to be tough to keep fighting the data.

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