- Surprisingly strong US jobs report sends dollar higher
- Stock markets hit new record highs despite Trump’s tariff threats
- Oil plummets, ISM data and RBA decision next
Dollar shines after impressive employment data
Another blockbuster jobs report highlighted the resilience of the U.S. economy on Friday, pouring cold water on bets of imminent rate cuts by the Federal Reserve. The U.S. economy added 353,000 jobs in January, nearly double what economists had projected, while last month’s numbers were also revised upward.
In another sign of strength, wage growth accelerated to 4.5% on an annual basis, fueling concerns that the war on inflation is not over. Markets interpreted the surprising jobs numbers as another sign that the Federal Reserve will not begin the rate cutting process in March, reinforcing Chairman Powell’s latest messages.
The probability of a rate cut in March fell to 15% afterwards. For the full year, fewer than five rate cuts are now included, compared to nearly six before this data set. As traders forecast a “higher for a little while longer” interest rate trajectory, the US dollar rose, riding the wave of rising yields.
The biggest loser against the dollar was the Japanese yen, which fell almost 1.5% on Friday as the gap between US and Japanese yields widened. The next event for the dollar will be the release of the January ISM services survey later today. More encouraging signs about the US economy from this leading indicator could completely close the door on a rate cut in March, adding fuel to the dollar’s rally.
Stocks hit new records
Wall Street stocks closed at new record highs last week, as signs of a strong labor market and reassuring tech sector earnings helped the market push aside the threat of delays to rate cuts.
The S&P 500 erased an initial decline following the nonfarm payrolls numbers and instead rose to new, uncharted heights with some help from stellar gains from Amazon (NASDAQ:) (+7.9%) and Meta Platforms ( NASDAQ:) (+20.3%). .
Stock markets are currently enjoying the best of all worlds. The U.S. economy and consumer spending remain resilient, the Federal Reserve will come to the rescue by cutting rates if growth falters, and, meanwhile, investments in artificial intelligence are driving gains. It is not surprising then that stock markets do not stop rising, despite valuations being so stretched.
Even some warnings from Donald Trump that he could impose tariffs of more than 60% on Chinese products if he is elected in November did not dent the cheerful tone of the markets. Investors might view such threats as inflated political rhetoric considering that even during the 2017 trade war, Trump did not go overboard with tariffs, minimizing the pain for American consumers.
Oil falls, ISM and RBA data next
Prices plunged last week, unable to capitalize on strong economic data, the upbeat tone of stocks or the latest U.S. strikes on Iranian-backed targets in Iraq and Syria.
Oil’s inability to recover in the face of seemingly positive developments highlights major concerns among investors, such as that OPEC+ supply cuts will not extend beyond March as the cartel moves to defend its market share from soaring US production. Coupled with the risk of weak demand from China as its real estate sector continues to deleverage, oil buyers could remain cautious for some time.
Looking ahead, the ISM services survey will be the main event today before attention turns to the Reserve Bank of Australia, which will announce its decision early on Tuesday. Recent data has been weaker of late, with inflation slowing sharply and job losses in the labor market, so there is a risk of the RBA abandoning its restrictive bias, leaving those vulnerable to another sell-off.