Markets had a lot to digest today and the signal they gave was risk-off. A move into the safe-haven of the US dollar and out of the commodity pairs happened, but investors also rotated out of equities and into fixed income.
The US non-farm payrolls came in at 210k versus the expected 550k. Fed Chair Powell said in a press conference earlier this year that the US economy had to create between 550k-600k each month if they were going to raise rates as the labour market got to maximum employment. Today’s data is going to be a major setback. As not only did the NFP number miss but there was a decline in average hourly earnings too. The US unemployment figure did come in slightly better than expected and for a few minutes, there was a small rally in the US indices which on the Nasdaq especially looked like an engineered stop run on yesterday’s high print.
The Volatility Index (VIX) continues to creep higher, and this is indicative of the larger ranges we are now experiencing on risk assets. The Nasdaq and S&P500 have both fallen over -1.0% in today’s trading so far. Anyone looking to get into a trade needs to have a wider stop than previous months and will need to reduce their position size and risk.
The US dollar index is higher on the day and is trading within the previous trading range of $95.50-$97.00. The US ISM Services PMI came in better than expected and this has given greenback traders some support as did rising factory orders. Fed’s Bullard said that the unemployment rate of 4.2% was reason enough to remove Fed support and that tapering could be finished by March 2022 and a reduction in the balance sheet should also be expected. The Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2021 is 9.7% on December 1, up from 8.6% on November 24, which would support Bullard’s Hawkish stance.
The TLT is one indication that there could be a switch from higher-yielding assets to safe havens or it could be signalling that the bond market doesn’t believe the Fed will be able to raise rates with any significance even with a faster tapering schedule. Today’s NFP number would support the pensions funds and large money managers' view. The US government could start missing payments on its obligations as soon as December 21st according to the Bipartisan Policy Centre. Hopefully, that statement was designed to focus the minds of US Senate Majority Leader Schumer and Minority Leader McConnell. Otherwise, the stock markets could be in for a real tumble, rather than a Santa Rally.
With S&P500 falling heavy again today if it were to take out yesterday’s low the probabilities of reaching towards the daily 200 EMA and the 4300 level would be raised. Prices paid and durable goods in the US factory orders, and ISM non-manufacturing index were lower today, so inflation could be on its way down. We have certainly seen a drop in the price of oil from the highs as have other inflated commodity prices. The IMF has called on the US to tighten monetary policy faster as they see inflation risks growing.
The Aussie fell further today and should reach the 0.7000 early next week if this momentum continues to push the price at this pace. We had called for a continuation of the trend in an earlier video today, where we explained where the draw for liquidity would probably be.