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Mixed Bag for Market 

Good news or bad news...markets are in a place now where everyone is trying to guess whether good news on the economy is good – soft landing – or bad – inflation stickier and hikes going on for longer. So, there was a lot to digest in Friday’s payrolls report, which blew past expectations. More important than the headline jump in jobs of 263k was the wage growth shock. Average hourly earnings rose 0.6% for the month, vs an expected +0.3% gain, and 5.1% year-on-year vs the 4.6% expectation. The S&P 500 closed a touch in the red but well off the lows of the day. 

 

Not a Labour of Love 

There are still over 10m job vacancies in the US, so it’s not surprising that wages are rising fast. A massive shortage of labour does not equal a situation where inflation comes down quickly. None of this is transitory – we are in a new inflation paradigm. We now enter the Fed blackout period ahead of next week’s decision, which Jay Powell indicated could be to slow the pace of rate hikes by raising 50bps. Looking ahead to today the ISM Services Index for November is expected at 53.7, while factory orders are seen at +0.7% but the main event this week is the PPI data on Friday.  

  

Chinese Market Benefits From Loosening Covid Measures 

Chinese stocks rallied despite a weaker Caixin services PMI as investors looked at signs the authorities are easing restrictions. The Hang Seng jumped more than 4%, with more timid gains on the mainland. It looks like Beijing is moving at a faster pace to ending its zero Covid approach than we’d thought before. European equities were mixed at the open ahead of a pretty sparse week for data, with basic resources up the most, food & beverage down. Christine Lagarde speaks twice this week though ahead of the European Central Bank’s blackout period – will she signal a 50bps is coming next week after data last week show inflation cooled unexpectedly? Caution around the next week’s huge central bank schedule (Bank of England in addition to the Fed and ECB) may make trading difficult – I don’t think we see much by way of direction until those meetings are cleared out of the way.   

  

Central Banks Make Their Move 

This week sees the Reserve Bank of Australia and Bank of Canada in action. After downshifting to 25bps in October, markets expect another quarter-point hike tonight. The BoC has hiked rates by 350bps since March, making it one of the most aggressive rate hike cycles. BoC governor Macklem has said the central bank is nearing the end of its tightening cycle but has also stressed that more hikes are required to slow inflation and has not ruled out another oversized hike. Markets expect the rate to reach 4.25% next year and stay there. The question is whether the BoC opts for 25bps this week or a final 50bps to finish the year.  

Minutes from the Riksbank this morning are interesting – the CB saying it would not be surprised if need to raise rates more, risk that high inflation becomes embedded…I think we are already there. It’s not transitory. Treasury yields have trended lower in recent weeks as markets trim expectations for the pace of hikes by the Fed. The 10yr sits just above 3.5% for now and this will be important for the dollar trade. Majors have recovered a good deal of ground, with both sterling and the euro blowing through their 200-day moving averages last week. USDJPY sits on key 200-day support at 135 now. With little to go on until the PPI report on Dec 9th, dollar weakness may be the focus this week with technicals not looking great. Sentiment has changed and the tide is now going against the greenback. 

 

Oil Slick Ahead 

As the G7/EU oil price cap of $60 on seaborne Russian crude kicks in, OPEC and allies chose to roll over current production quotas but said they would not hesitate to adjust output to stabilise the market. Russia’s deputy PM Alexander Novak said Moscow will not export oil to countries participating in the price cap, even if that means they need to cut output. Crude gapped higher at the open last night but has been falling throughout the Asian session with spot Brent at $85.80.  

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