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Fed Pivot Hopes Stabilize, Leaving Currencies Unmoved

Equity markets are down ahead of the North American open after midair blowout on an Alaska Airlines flight hammered Boeing shares and lent new meaning to the term “window seat” – but risk appetite in other asset classes has been left largely unaffected. Fixed income and currency markets are relatively stable, with the dollar retreating only modestly from its early-year highs.

Friday’s session was full of sound and fury, signifying nothing. Treasury yields and the dollar rallied when data was released showing US job creation and wage gains accelerating in December, but the move faded as traders parsed the details, and was fully reversed less than two hours later when the Institute for Supply Management (ISM) said its services activity index fell to 50.6 in December from 52.7 in November, sharply missing estimates that had been set closer to 52.5. The employment subcomponent plunged 7.4 points, with respondents reporting a rise in layoffs due to “economic uncertainty and decreasing consumer demand”.

The policy implications are unclear. Details below the headline level in both the non-farm payrolls (see Skanda Amaranth’s excellent Twitter thread here) and the ISM reports are consistent with a rapidly-cooling labour market, but with most industries reporting job gains, and last year’s ISM displaying similarly negative seasonal characteristics, the evidence isn’t yet incontrovertible. Although an economic downturn looks imminent, Federal Reserve officials aren’t yet in the clear on the inflation side – a resurgence is possible if the prospect of imminent rate cuts boosts consumer spending, home buying activity, and business investment.

Dallas Fed President Lorie Logan acknowledged this complexity on the weekend, saying “We can’t count on sustaining price stability if we don’t maintain sufficiently restrictive financial conditions” while also noting that the central bank’s balance sheet reduction efforts were beginning to impact liquidity conditions in some corners of the Treasury markets. Noting that the current rate of shrinkage is “around twice what it was in the first half of 2019,” she recommended slowing the runoff as system balances fall – a step that would – relative to the current trajectory – effectively reduce the Treasury’s private-sector funding needs and boost overall liquidity.

With similar dynamics in play across most developed economies, implied currency volatility remains distinctly depressed. The euro and pound have seen gains evaporate as policy expectations have converged with the US, and diminished tightening odds are keeping Japan’s yen firmly rangebound. The Canadian dollar is trading with a generalised lack of conviction, hemmed in by clear-cut evidence of an economic slowdown on one hand, and the risk of an easing-driven “melt-up” in property markets on the other. Although speculators are broadly bearish on the dollar, overall foreign exchange market positioning looks fairly neutral, reducing the risk of a “short squeeze” in any of the majors.

Net Long (+) or Short (-) US Dollar Futures Position Held by Large Speculators, Billions US Dollars

The week ahead looks relatively quiet from a data perspective, but ten-year yields could easily tumble back below the 4 percent threshold when the US delivers its latest consumer price index and jobless claims numbers on Thursday. Core inflation is expected to decline for a ninth consecutive month while the number of continuing claims should keep rising, helping ratify investor wagers on rate cuts coming as soon as the Federal Reserve’s March meeting. The dollar’s strength is at risk in the near term.


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, but the core basket should slow 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)

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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