This week's focus has been on central bank monetary policy and data points that inform the central banks. Inflation is higher, wages are increasing at an inflationary pace, and energy prices have gone through the roof, contributing to inflation. Traders are aggressively pricing rate hikes from central banks that are set to start this year, even though central banks have warned against aggressive hikes through 2022.
The US Bureau of Labour Statistics reported this afternoon that nonfarm employment increased by 467,000 in January. Market expectations were exceeded but more importantly, the previous month was revised higher too. I am still referring to the chart I posted a couple of days ago which shows how the ADP and NFP have a closer relationship than the current figures would suggest. Somewhere in the data is a big discrepancy and the two reports will converge.
In January, the unemployment rate reached 4%, an increase of 0.1 percentage points from the previous month. Participation in the labour force increased by 0.3 percentage points to 62.2%, which is still low by normal standards and like the 1977 levels.
A total of 151,000 new jobs were created in the leisure and hospitality sector, which is where the ADP numbers out a couple of days ago showed the biggest decrease. Employment in the professional and business services sector increased by 86,000, while retail trade added 61,000 jobs. In January 2022, the average hourly wage for all employees on private nonfarm payrolls rose by 23 cents to $31.63. This represents an increase of 5.7% from December 2021. Wage inflation could spiral and fuel higher inflation which will then need to be tackled by the Fed and Central Banks.
The good employment news translated into a drop in US Treasuries and with the benchmark ten-year Treasury note returning the highest rate since December 2019. While the 10-year hasn't quite reached 1.940% as of the time of this writing, implied volatility has priced in 139bps of rate hikes by December 2022. Which takes the yield back towards the 3% last seen in December 2018. Expectations are now that the Fed raise rates by 50bps in March.
The US dollar has a lot of backfilling to do to remove the volume gap that occurred when ECB President Lagarde began speaking yesterday. Before we do that, we may have to just revisit the levels before the NFP impulsive candle from today.
Despite the rising US dollar, Brent is on its way to the $100 per barrel even after OPEC+ agreed to increase flows by 400k BPD in March. The rise is being put down to a massive cold snap sweeping across America and the geopolitical tensions growing on the Ukrainian border. According to the Baker Hughes' weekly rig count, the number of US oil rigs increased by 2 to 497 during the week ending February 4.
The S&P500 is forming a basing pattern that may go some way to melting higher into today's close. The moves have been volatile this week and traders who have made money will be closing for the weekend and we’re usually in a low volume environment after NFP. 4580 looks like a great target for anyone who did get long today but after that, I still don’t see anything which gives the equities a reason to retrace the January fall.