Wall Street drops and Dollar climbs following US NFPs, attention turns to CPI data
US Non-Farm Payrolls data for December revealed a stronger than expected labour market. Employment rose by 256,000 for the month, vastly outstripping the 164,000 forecast, with the increase enough to push the unemployment rate down to 4.1%. The figures stoked fears that the US economy may still be too hot and is potentially re-accelerating, placing upward pressure on inflation.
(Source: Trading Economics)
The data led to a further unwind of Fed rate cut expectations. The markets are now pricing in only one cut from the Fed in 2025, with expectations for the solitary move being deferred to the December meeting. Fundamentally, the markets are fearful that despite last year's brief growth shock, the US economy is resilient, with inflation subsequently sticky. Furthermore, this strength is coming ahead of several expected tailwinds to inflation from the incoming Trump administration, including tax cuts and tariffs.
(Source: Bloomberg)
Following the Non-Farm Payrolls number, along with hotter than expected ISM business surveys which pointed to building price pressures and the University of Michigan inflation expectations which showed long-term inflation expectations at a 17 year high, the markets now turn to this week’s US CPI and Retail Sales data. Headline CPI is tipped to rise to 2.9% y/y from 2.7% last month, with the core figures forecast to remain steady at 3.3%. Meanwhile, core Retail Sales is projected to lift by 0.5% in signs of a robust household sector.
Further signs of strong demand and building price pressures in the US economy will likely add momentum to the rates market repricing and fan speculation the Fed may not be able to cut rates any further from here. Such a dynamic would likely place upward pressure on yields and the US Dollar, with the 10-year yield nearing a 15-month high and eyeing 5% once again and the Greenback at a more than 2-month high. Any rise in yields would risk a further compression in equity multiples, with US indices re-rating as market rates rise.
The NASDAQ at risk of further downside despite positive technical signs
While still in a primary uptrend, short-term momentum for US equities has slowed considerably, especially amongst the tech sector, which has been the lynchpin of Wall Street’s bull market. The NASDAQ’s technicals currently look more like a market consolidating and carving out a continuation pattern. However, a further run up in yields would risk deflating valuations further. The 20,7000 mark looks like a critical level of support.
(Source: Trading View)
(Past performance is not a reliable indicator of future results)