The dollar is making big gains and US stocks are resisting the global rally

LONDON/NEW YORK (January 3) (Reuters) – The dollar headed for its biggest one-day rally in more than three months on Tuesday, while US stocks bucked a rally in global stocks in a week full of macros that may provide guidance as to when, and at what level, it might report. US interest rates peaked.

MSCI All-World Index (.MIWD00000PUS) It fell 0.15%, dragged down by a drop in US stocks, while European stocks jumped to their highest levels in two weeks, propelled by huge gains in anything from financials, to oil and gas stocks, to healthcare.

Dow Jones Industrial Average (.DJI) It lost 0.1% in early trade, the S&P 500 (.SPX) Decreased 0.3%, the Nasdaq Composite Index (nineteenth) lost 0.6%.

The dollar index was last up 0.7%, at 104.42.

The euro was the worst performer against the dollar, falling by the most since late September, after German regional inflation data showed that consumer price pressures eased sharply in December, thanks in large part to government measures to contain natural gas bills for households and businesses. . .

Data on US payrolls this week is expected to show that the labor market remains tight, while consumer prices in the European Union may show some slowdown in inflation as energy prices fall.

“Energy base effects will significantly reduce inflation in major economies in 2023, but stability in the underlying components, much of this stemming from tight labor markets, will prevent early pessimism by central banks,” NatWest Markets wrote in a note.

They expect interest rates to reach 5% in the US, 2.25% in the EU and 4.5% in Britain and to stay there throughout the year. On the other hand, markets are pricing in rate cuts in late 2023, with Fed funds futures pointing to a range of 4.25% to 4.5% by December.

“The thing that makes me nervous this year is that we still don’t know the full impact of the very significant monetary tightening that’s happened across the developed world,” said Callum Pickering, chief economist at Berenberg.

“It takes a good year, or 18 months, for the full effect to kick in,” he said.

Central banks have expressed concern about rising wages, even as consumers struggle to keep up with the rising cost of living and companies are running out of space to protect their profitability by raising their prices.

But Pickering said the job market tends to lag the broader economy for some time, which means there is a risk that central banks could raise interest rates more than the economy can handle.

“What central banks are stimulating is basically an increase in cyclicality, which is — they overstimulated in 2021 and triggered an inflationary boom and then tightened in 2022 and triggered a counter-inflationary slump. It’s exactly the opposite of what central banks want you to do,” he said. .

Investors will get their first insight into the central bank’s thinking later this week when the Federal Reserve releases minutes from its December policy meeting.

The minutes probably show that many members saw the risks that interest rates may need to be higher for longer, but that investors understand how much higher they really are.

In the markets, European stocks rose thanks to gains in traditionally defensive sectors, such as healthcare and food and beverages. Pharmaceutical makers Novo Nordisk (NOVOb.CO)AstraZeneca (AZN.L) and Roach (ROG.S) She was among the largest positive weights on the STOXX 600 (.STOXX)along with Nestlé (NESN.S)

The Stoxx index, which lost 13 percent in 2022, rose 1.3 percent. FTSE 100 index (.FTSE)The only major European index not trading on Monday rose 1.4%.

Markets for a while priced in eventual US easing but were sorely wrong by the Bank of Japan’s sudden upward shift in its yield ceiling.

The Bank of Japan is now considering raising inflation forecasts in January to show price growth close to its 2% target in fiscal 2023 and 2024, according to the Nikkei.

Such a move at its next policy meeting on January 17-18 will only add to speculation of an end to a very loose policy, which has essentially served as a floor for bond yields globally.

The policy shift boosted the yen across the board, with the dollar losing 5% in December and the euro 2.3%.

The yen took a break on Tuesday, slipping 0.36% against the dollar, to 130.765. The dollar earlier touched a six-month low of 129.52 yen. Against the dollar, the euro fell 0.9% to $1.05690, after falling as much as 1.4% earlier in the day.

“A theme we’ve noticed a lot is the negative seasonality of the euro in January, down about 1.3% since 1980 on average in January, with up to 64%. If history is a guide, it’s a tough month for euro longs,” Nomura said the strategist. Jordan Rochester.

Oil succumbed to the strength of the dollar, and reversed course, as concern about demand in China, the second largest economy in the world, decreased, adding to the bearish momentum.

A slew of surveys showed that Chinese factory activity contracted at the sharpest pace in nearly three years as coronavirus infections swept production lines.

“China is entering the most dangerous weeks of the epidemic,” warned analysts at Capital Economics.

Brent crude lost 2% to trade around $84.22 a barrel, after hitting a session high of $87.00 earlier.

Reporting from Wayne Cole. Editing by Bradley Perrett, Sam Holmes, Chizu Nomiyama and Andrea Ricci

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