Stock markets are limping into Thursday’s session in a frightened state after the minutes from the December Federal Reserve meeting pointed to a faster than expected hike in interest rates.
Asian stocks flashed red this morning following the heavy selloff on Wall Street overnight as hawkish signals from the FOMC minutes and spread of the Omicron variant sapped investor confidence. Gold has also found itself under pressure with prices struggling to keep above the psychological $1800 support level. In the FX space, the dollar appreciated as US Treasury yields jumped after the meeting minutes were released.
Given the market reaction to a more hawkish Fed, global equities certainly remain highly sensitive to increased rate hike expectations. With the US December jobs report around the corner, the atmosphere across the board could become tense and nervy as investors adopt a cautious stance. Whatever the outcome on Friday, the first trading week of 2022 has already kicked off with a bang.
It’s all about the US non-farm payrolls
All eyes are now firmly focused on December’s US jobs report which will be released on Friday. The pending data will be heavily scrutinised by investors for key insight into the health of the US labour market and wage growth.
Yesterday, the ADP Employment Report revealed that private sector employment surged by 807,000 in December. This figure smashed market forecasts and was a big jump from the 505,000 witnessed in November. Even though the ADP data is a poor predictor of the key non-farm payrolls report on Friday, markets may be readying themselves for a potential upbeat number. Consensus expects 425,000 jobs to have been created by the US economy last month, with the unemployment rate falling to 4.1% from 4.2%.
One thing to keep in mind is that the US jobs report is being released at a time when the Fed has signaled interest rate hikes may be more aggressive than expected, amid concerns over soaring inflation. The March Fed meeting is now very much “live” with an 80% chance of an interest rate hike. The general consensus at the Fed also appears to be emerging that the maximum employment goal is now within reach, so NFP may play a big part in validating this thinking.
Should the jobs report exceed market expectations, this is likely to boost confidence in the US economy and reinforce expectations that the Fed will raise interest rates in the Spring. Such a development may result in a stronger dollar while pressuring equity bulls and gold further. Alternatively, a massive payroll miss similar to November may raise questions over the health of the US economy and the Fed’s ability to aggressively raise rates.
Commodity spotlight – Gold
A stronger dollar, hawkish Federal Reserve, and rising treasury yields make a poisonous cocktail for gold. The precious metal is under pressure on the daily charts with prices struggling to keep above $1800 as of writing.
Where the precious metal closes the week is likely to be heavily influenced by the key US jobs data on Friday. A strong report could cripple gold bugs, opening a path lower towards $1786 and $1770. Should $1800 prove to be reliable support, prices may rebound back towards the $1810 and $1831.
Lukman Otunuga is a Senior Research Analyst at FXTM