Monday Feb 6 2023 08:45
6 min
FTSE 100 Drops, Dollar Rises
The FTSE 100 came off its all-time high early on Monday as European stock markets traded broadly lower following Friday’s monster US jobs report sent risk south. The dollar is bid and front-end yields higher after nonfarm payrolls blew past forecasts to point to a resilient labour market that won’t be shouting at the Fed to pause hikes. Gold moved sharply lower along with stocks on higher real and nominal rates as the market went into good news is bad news mode, whilst the rally in Asian equities was popped like a Chinese spy balloon.
US Jobs Report Boosts Dollar, Hurts Stocks
Some 517k jobs were added and unemployment declined to 3.4%, the lowest since 1969. It just underlines the super tight labour market won’t let the Fed stop hiking. It was too early to declare victory and think peak rates. Inflation higher for longer, especially as the market is buying the Fed pause idea and financial conditions are loosening. Every time the Fed blinks the market jumps and inflation gets worse and harder to tame.
The question is whether we’re in Goldilocks territory – falling inflation and declining unemployment looks great if you are a central banker – and ought to be positive for risk. But the market reaction was instructive as a full 25bps of rate cuts was priced out of later in the year, and stocks dropped fairly sharply with the S&P 500 down more than 1% and the Nasdaq declined 1.6%. One interesting detail from the BLS report was that immigration boosted the participation rate by 0.1% and maybe helped keep wage demands down. This could suggest easier conditions for achieving a soft-ish landing whilst still slaying inflation.
BofA Warns Against US SPX rally
Noting Tesla 58% vs -20% in MOVE index of US Treasury YTD, BofA says the ‘most painful trade [is] always “apocalypse postponed”; rally kick-started by ugliest of CPI reports on Oct 12th, likely ends with pretty “peak Goldilocks” inflation print … we say fade SPX >4.2k, Q1 highs likely before Valentine’s Day. BofA adds that while Fed futures say one last 25bps hike, then 200bps of cuts Jul'23 to Dec'24, the bear risk is still that disinflation proves “transitory” and/or “no landing” in H1 flips to “hard landing” H2... ‘but shorts must first become longs before stagflation can hurt Goldilocks’.
It was a different story for UK equities as the FTSE 100 hit record closing and intra-day highs at 7,901.8 (prev 7,877.45) and 7,906.58 (prev 7,903.50), respectively. You can chalk it down to all sorts but I guess some kind of latent head-in-the-sand peak rates narrative combining with soft landing to create a kind of goldilocks scenario…that and the fact it’s had a good run up last year that has left it in a better position to capitalise on some decent flows into equities this year, particularly under-loved European equities.
UK FTSE Hits All-Time High, Driven by Investor Optimism
A fresh all-time high for the index in this kind of macro environment probably reflects a bit of defensiveness among global investors in a sense looking for dependability in times of stress, relative cheapness and a weaker pound (in dollar terms we are a long way off the all-time high), a belief the Fed is almost done with rate hikes as inflation peaks, and hopes that China’s reopening will drive the commodity and energy sectors. But we also have seen some good broadening in terms of the types of stocks driving the rally with more of those domestically-oriented stocks getting in on the action in the year to date – housebuilders like Persimmon, Barratt, Taylor Wimpey, Auto Trader, Kingfisher, Sainsbury’s, Whitbread, Rightmove – and actually some of the more defensive, global type names like Diageo, AstraZeneca, British American Tobacco etc haven’t had such a good year. More stocks getting in on the action is healthy. And the FTSE is chock full of companies that didn’t get sold hard last year, setting it up to be in a better position to attack the all-time this year on some very positive equity flows.
Meanwhile...
Later today, Bank of England governor Andrew Bailey speaks after last week’s rate hike, whilst chief economist Huw Pill is also due to speak.
Later this week, the Reserve Bank of Australia faces accelerating inflation - CPI rose 7.8% year-on-year in the final quarter vs the forecast 7.6%. This latest rise in inflation puts more pressure on the RBA to hike interest rates further – another 25bps hike looks assured now. The RBA hiked rates by a combined 300bps last year and markets expect one or two more 25bps this year before peaking. Rising inflation might force a reset in market pricing for the terminal rate. Fed chair Jay Powell speaks later in the US session.
Jay Powell speaks on Tuesday, affording him the opportunity to lay out a higher-for-longer narrative – but does he bear down or let the data guide him from here on out?