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Dollar Climbs Ahead Of Payrolls

Rate-sensitive currencies and financial assets are retreating once again as overwrought monetary easing expectations undergo a forced unwind. Odds on a rate cut at the Federal Reserve’s March meeting have fallen below 65 percent from over 90 percent in December, with this morning’s non-farm payrolls report expected to show the US job creation engine continuing to churn out new roles.

Markets think 170,000 new jobs were added in December, even as wages cooled and the unemployment rate rose to 3.8 percent. Data out yesterday showed continuing claims remaining low against an improved private sector hiring backdrop. Equity futures are softer, ten-year Treasuries are once again yielding more than 4 percent, and the dollar looks headed for its biggest weekly gain since last August.

Surprises are strongly possible in today’s report, particularly if seasonal adjustment factors play a bigger than expected role, but we believe job gains will slow sharply in January and February, pushing the unemployment rate higher in a manner consistent with an economic slowdown. We don’t expect an easing response from an inflation-wary Fed until consumer demand shows clear signs of weakness, perhaps by early summer.

A March cut from the European Central Bank also looks unlikely. According to data released earlier this morning, inflation in the common currency area rose 2.9 percent in the year to December, up from the prior month’s 2.4 percent on unfavourable energy subsidy-related base effects, but lower than the 3 percent consensus forecast. Core inflation, which excludes highly-volatile food and energy prices, slowed to 3.4 percent from 3.6 percent in November, while the services sector – closely watched by policymakers for signs of “sticky” price pressures – held steady at 4 percent. The euro popped modestly higher on the print, but remains lower on a year-to-date* basis, with price action still more heavily driven by moves in US rate and equity markets than by domestic fundamentals.

The Canadian dollar is languishing near a two-week low ahead of data that is expected to show job creation lagging population growth. The “whisper number” among traders is pointing to an above-consensus 25,000-position gain, but the unemployment rate is still seen rising to 5.9 percent in December. As previously noted, a Canada-adjusted version of the Sahm recession rule was triggered back in October, suggesting that the economy is already in a downturn. Although the currency is likely to retreat further in the face of a resilient dollar over the coming weeks, we’re unsure on the longer-term direction, with easing financial conditions generating entirely plausible tailwinds in a deeply-unhinged housing market over the months ahead.

*We’re not sure using year-to-date measures is good form yet, but at least we’re not quoting the Dow in points, or the VIX in percentages.


2023’s final non-farm payroll report should show job generation slowing from November’s level, with the unemployment rate creeping back up. Seasonal hiring could deliver an upside surprise, but consensus estimates suggest 170,000 new jobs were created in the month, with the jobless rate climbing to 3.9 percent from 3.7 percent previously – exhibiting a worrisome direction of travel, but one not yet consistent with recessionary conditions. Revisions could play an interesting role however – if prior months are revised in a negative direction, market bets on a harder landing could come back into vogue. (08:30 EDT)

With population growth outpacing job creation, Canada’s labour market may have loosened further in December. Market consensus is aligned around a circa-10,000-position job gain in the month, but the unemployment rate is seen ticking up to 5.9 percent, setting the stage for another cautionary statement from the Bank of Canada on January 24th. (08:30 EDT)

The US services sector probably slowed in December, with the Institute for Supply Management’s services index slipping from November’s 52.7 level as consumers and businesses turned more cautious into year end. Overall activity should remain strongly positive however, pointing to continued resilience in household spending – which we expect will begin fading in the months ahead. (10:00 EDT)


We suspect the New Year’s earthquake would make a rate increase at the Bank of Japan’s January meeting untenable anyway, but a softening in Tokyo inflation rates should provide further motivation to stay on hold. Consumer price growth in the country’s biggest metropolis probably slowed last month, with falling energy benchmarks intersecting with a stronger yen to put pressure on overall import costs. (18:30 EDT)


Markets are braced for a modest re-acceleration in US headline inflation in December’s data, with the month-over-month increase in prices moving up to 0.2 percent from 0.1 percent in November. Higher gasoline costs are seen pushing annual price growth to 3.2 percent from 3.1 percent prior, with the core basket slowing to 3.8 percent from 4 percent prior. An above-consensus print could force markets into lowering the number of rate cuts expected over the next year, while a weaker number might drive a doubling-down on the “soft landing” thesis that lifted global asset prices in November and December. (08:30 EDT)


The British economy is seen bouncing back from October’s -0.3 percent contraction in November, but a modest 0.2 percent gain is unlikely to fully offset recessionary risks. Signs of improvement are appearing – consumer confidence and retail sales have risen in recent months, and purchasing manager surveys are pointing to a stabilisation in business investment – but output may have shrunk another -0.1 percent in the fourth quarter of 2023, and could remain in contractionary territory for months yet. If inflation follows current consensus in falling precipitously, the Bank of England is likely to begin a rhetorical pivot imminently. (02:00 EDT)

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