The dollar index (DXY00) Friday rose by +0.44% and posted a 2-year high. Friday’s stronger-than-expected US Dec payroll report pushed bond yields higher and boosted the dollar as unexpected signs of strength in the labor market reduced the chances of Fed rate cuts. The dollar added to its gains after Friday’s University of Michigan US Jan inflation expectations indicator unexpectedly accelerated. The dollar also has carryover support from hawkish comments Thursday from Fed Governor Bowman and Fed President Collins and Schmid, who expressed their support for the Fed’s pause in its rate-cutting cycle. Friday’s slump in stocks has also increased liquidity demand for the dollar.
US Dec nonfarm payrolls rose +256,000, stronger than expectations of +165,000 and the largest increase in 9 months. Also, the Dec unemployment rate unexpectedly fell -0.1 to 4.1%, showing a stronger labor market than expectations of no change at 4.2%.
US Dec average hourly earnings unexpectedly eased to +3.9% y/y versus expectations of no change at +4.0% y/y.
The University of Michigan’s US Jan consumer sentiment index fell -0.8 to 73.2, weaker than expectations of no change at 74.0.
The University of Michigan’s US Jan 1-year inflation expectations indicator unexpectedly accelerated to an 8-month high of +3.3%, stronger than expectations of no change at +2.8%. Also, the Jan 5-10 year inflation expectations indicator unexpectedly jumped to a 16-year high of +3.3%, stronger than expectations of no change at +3.0%.
Fed Governor Bowman said, “The rate of inflation declined significantly in 2023, but this progress appears to have stalled last year with core inflation still uncomfortably above the FOMC’s 2% goal. Thus, I continue to prefer a cautious and gradual approach to adjusting policy.”
Boston Fed President Collins said she favored fewer rate cuts this year than she had anticipated just a few months ago and that a slower approach to adjusting interest rates is merited now as officials confront “considerable uncertainty” over the US economic outlook.
Kansas City Fed President Schmid said, “With inflation close to target and growth showing continued momentum, I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral.”
The markets are discounting the chances at 3% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Friday fell by -0.61% and posted a 2-year low. Friday’s stronger-than-expected US Dec payroll report sent the dollar soaring and undercut the euro. Losses in the euro are being contained after the 10-year German bund yield rose to a 6-month high Friday, supporting the euro’s interest rate differentials.
Swaps are discounting the chances at 95% for a -25 bp rate cut by the ECB at its next meeting on January 30.
USD/JPY (^USDJPY) Friday fell by -0.16%. The yen recovered from a 5-3/4 month low against the dollar Friday as short covering emerged in the yen on concern that the rally in crude oil prices to a 3-month high will boost inflation expectations, a hawkish factor for BOJ policy. The yen also has support after Bloomberg reported that BOJ officials are likely to discuss raising their inflation outlook at a policy meeting later this month, citing a recent surge in the cost of rice and the weakening yen since the last outlook report in October.
The yen Friday initially sold off to a 5-3/4 month low after the better-than-expected US Dec payroll report pushed the dollar and T-note yields higher and weighed on the yen.
The Japan Nov leading index CI fell -2.1 to 107.0, weaker than expectations of 107.2.
Japan Nov household spending fell -0.4% y/y, a smaller decline than expectations of -0.9% y/y.
February gold (GCG25) Friday closed up +24.20 (+0.90%), and March silver (SIH25) closed up +0.299 (+0.96%). Precious metals settled moderately higher on Friday, with gold and silver posting 4-week highs. Precious metals are climbing on increased safe-haven demand amid fears President-elect Trump’s tariff policies could ignite a global trade war. CNN reported Wednesday that Mr. Trump is considering declaring a national economic emergency to push through his tariff plans. Precious metals added to their gains Friday after the University of Michigan’s US Jan inflation expectations indicator unexpectedly accelerated, boosting demand for precious metals as a hedge against inflation. In addition, Friday’s stock slump has increased the safe-haven demand for precious metals. Finally, precious metals have continued safe-haven support from geopolitical risks after the recent collapse of the Syrian government and the escalation of hostilities in the Ukraine-Russia conflict.
Precious metals rallied on Friday despite a rally in the dollar index to a 2-year high. Also, Friday’s stronger-than-expected US Dec payroll report reduces the chances of additional Fed interest rate cuts, a bearish factor for precious metals. In addition, Friday’s soaring global bond yields are bearish for precious metals. Finally, a Bloomberg report Friday weighed on precious metals as the report said BOJ officials are likely to discuss raising their inflation outlook at a policy meeting later this month, which may prompt the BOJ to raise interest rates.
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