US equities fall on stronger ISM Services PMI and WSJ’s Timiraos article. Risk assets may have peaked, awaiting next week’s pivotal year-end events

By Stuart Talman, XE currency strategist

See-sawing price action characterised Friday’s US session as risk assets were forcefully sold immediately following the release of a stronger-than-expected US jobs report.

Polled economists had forecasted around 200K new jobs created for the US economy in November – the headline non-farm payroll data point printing at 263K.

Whilst the unemployment rate remained steady at 3.7%, the average hourly earnings component of report was a major talking point.

Doubling expectations (0.6% vs 0.3% MoM), the hot wages growth number raises concerns over a potential wage-price spiral, potentially requiring the Fed to prolong the tightening cycle, hiking the Fed funds target rate beyond 5%.

Wage-price spiral concerns a key factor in forcing the RBNZ to step-up to a 75 bps hike at its most recent meeting.

US equities came under pressure in the wake of the undesirably strong labour market update, the S&P 500 down over 1.2% at the open.

Having ripped higher following Powell’s (questionably) dovish speech on Thursday morning, the New Zealand dollar was trading just above 64 US cents prior to the release.

The Kiwi plunged through 0.6330 in response.

Observing the price-action in real-time, the immediate thinking was the session ahead would deliver a huge downside move for US stocks given Thursday’s “overreaction” to Powell’s speech.....the Kiwi likely to struggle to maintain a foothold above 63 US cents.

Risk assets have commenced the new week on the back foot, initial positive risk sentiment in Asian trade reversing through the European afternoon. Selling pressure has intensified through the New York morning.

Starting in the 0.6370’s, the New Zealand dollar caught a bid in morning trade, adding to Friday’s curious gains in which risk assets rallied despite the undesirably stronger-than-expected US jobs report.

Resilient jobs growth and higher wages conflicts with the Fed’s desire to reign in multi-decade high inflation.

The catalyst for Monday’s morning’s risk positive rally was the weekend news flow out of China, reporting that Chinese authorities continue to relax Covid protocols in major cities across the country, including Shanghai and Beijing.

Chinese stocks added to their recent strong performance, surging higher by over 4.5%. From early November, the Hang Sang has logged 6 days of 4%+ gains, the largest being a near 8% gain on 11 November.

The China re-opening trade aiding the year-end risk rally that commenced off the October cycle lows.

The Kiwi ascended through last week’s high marking Monday’s high a few pips above 0.6440 in the Asian afternoon.

Drifting back below 64 US cents through the European session, the losses have been steep in overnight trade.

The two drivers – an article from the Wall Street Journal’s Nick Timiraos, aka the Fed Whisperer and a large upside beat for a key reading of US services activity – the ISM Non-Manufacturing PMI.

Last week, Fed Chair Jerome Powell commented in his Brooking’s Institute speech that the time was now right for the Fed to slow the pace of rate hikes. He also cautioned that monetary policy is likely to remain restrictive for some time until real signs of progress emerge on inflation.

The market had blinkers on – interpreting the speech as dovish.

Timiraos’ latest report looks to be an attempt to provide the market with a dose of Fed reality, commenting:

Federal Reserve officials have signalled plans to raise their benchmark interest rate by 0.5 percentage point at their meeting next week, but elevated wage pressures could lead them to continue lifting it to higher levels than investors currently expect.

Whilst markets currently price in a terminal Fed funds target rate just below 5%, the major risk to the market’s current rally is Fed officials intent to keep hiking above 5%, potentially into the 6%-7% region.

Friday’s strong employment report feeds into the narrative of a prolonged and higher tightening cycle.

And more fuel was deliver overnight via the significantly stronger than expected (56.5 vs 53.1) ISM Non-Manufacturing PMI.

A key measure of services activity for the US economy, the hot data point is in contrast to last week’s ISM manufacturing PMI which fell into contractionary territory (sub-50.0) for the first time since May 2020.

The immediate reaction was forceful selling of US equities, higher US bond yields and a higher dollar.

The Kiwi plunged from north of 64 US cents to early morning lows marked a couple of pips above 0.6300.

Price action has generated a bearish outside bar – the high and low of the day have exceeded the previous day’s range with the (theoretical) daily close occurring near the bottom of the current day’s range.

This technical price pattern can be a reliable trend reversal signal.

We’d need to see follow through selling over the next 48 hours and price action trading back below the 200 day moving average for confirmation that the stunning year-end rally is exhausted.

In other news from Monday’s sessions, eurozone retail sales were weaker-than-expected, logging the largest decline in trade in over 12 months – a clear signal that rising borrowing costs, historically high inflation and a deepening energy crisis is dampening household spending.

The euro was softer against the dollar, EURUSD pulling back from a 6 month high and key technical resistance located near 1.0600.

Ove the past three trading days, NZDEUR has logged highs within a pip or so of 0.6090. Monday’s souring risk sentiment driving the pair back down to within reaching distance of 0.6000.

Having gained close to 7% from the 17 October cycle low, NZDEUR likely range trades ahead of a pivotal week, next week.

The ECB along with the Fed and BoE will deliver their year-end monetary policy update, market pricing shifting back in favour of a 50bps hike following last week’s softer-than-expected eurozone CPI report.

The EUR will likely come under pressure throughout the northern hemisphere winter as energy prices are predicted to head higher.

The Russian oil price cap commences this week – many energy analysts forecast this will have the undesired effect of putting upside pressure on crude prices as the Russian’s limit oil supply by refusing to sell to nations participating in the cap.

Looking ahead to today – the RBA’s rate decision is the sole tier 1 market moving event for the global calendar.

The consensus pick is for the Australian central bank to raise the cash rate by 25bps to 3.10%.

The labour market remains tight, the jobless rate remaining at 50-year lows. The recent stronger-than-expected wage price index data also a factor for the RBA to keep hiking despite being the first major central bank to downshift to smaller hikes in October.

Most analysts at the major banks are calling for terminal rate pricing in the region of 3.25% to 3.85%.

Attention will be given to the all-important last paragraph of the accompanying statement as this often signals what the RBA will do at upcoming meetings.

Reaching its highest point since January, NZDAUD has modestly retreated from yesterday’s high logged a couple of pips shy of 0.9440.

With no apparent event risk (RBA aside) to drive offshore sessions it will be interesting to observe price action through the middle-part of this week.

Will risk assets continue to give back gains ahead of the Fed, anticipating renewed hawkishness from Jay Powell, or will US equities and other risk assets consolidate near recent highs, positioning for another leg-up into year-end?

Monday’s price action is flashing a tentative reversal signal......we look for the Kiwi to extend lower through 63 US cents as conformation that a tentative mood persists.

Stuart Talman is Director of Sales at XE. You can contact him here.