US stocks are under pressure after another round of economic data suggest central bank tightening by both the Fed and ECB might have to be more aggressive. The bond market selloff returned after EU core price inflation hit fresh record highs and US jobless claims edged lower and as labor costs surged. The 10-year Treasury yield is surging, up 6.7bps to 4.058%, while the 30-year rose above 4.00% for the first time since November. The 2-year Treasury yield is 4.4 bps higher to 4.923% and seems destined to make a run at 5%. The dollar index is up 0.5% to 105.04.
Jobless Claims
Another strong print for the labor market. Jobless claims don’t want to rise, a sign that the labor market is still strong. Initial jobless claims edged lower from 192,000 to 190,000, a beat of the 195,000 consensus estimate. Continuing claims also softened from an upwardly revised 1.660 million to 1.655 million. Eventually the economy will the impact of the Fed's rate hiking campaign, so claims should be poised to rise significantly in the coming months.
The final fourth quarter reading for nonfarm productivity and labor costs were also released. A bit old, but nonetheless still showing pressure is on companies to keep wages rising. Nonfarm productivity was revised lower from 3.0% to 1.7% (largest annual decline since 1974) and unit labor costs jumped from 1.1% to 3.2%.
The economy is still looking robust and that should keep the Fed’s hawkish speak going. Rates will undoubtedly be higher for longer, but the risks of larger than quarter-point rises may be back on the table. Yesterday, Fed’s Kashkari said he is open minded to either a 25 or 50 bps rate rise, but focused on the dot plots, which he will lean towards further rate hikes. All eyes will be on Powell's semi-annual monetary policy report to Congress.
Oil
This China economic led oil price rally is fighting against the tentative return of the king dollar trade as the US labor market still shows no signs of weakening. Normally impressive US labor data is good news for the argument for improving short-term crude demand drivers, but that is not the case right now. The US economy might have to deal with a much more aggressive Fed, which could mean the economy might have to suffer something harder than a short and shallow recession later this year. Another strike against oil is the inflation outlook for the eurozone, which might also force the ECB to be even more aggressive with tightening, just like the Fed.
China’s improving demand outlook could still take WTI crude towards the $80 level, but it might struggle to do so if this dollar rebound shows no signs of slowing down.
Gold
Gold prices are struggling after the bond market selloff accelerated following robust labor data that is sending Fed rate hike bets higher. Gold’s got a few big events coming up that will determine its fate. Next is the ISM Services index, which could provide some insight if the economy will come back to reality following a very robust January. Next week is all about Fed Chair Powell’s semi-annual monetary report to Congress and the nonfarm payroll report.
Gold might settle down to a range leading up to these events, with $1825 providing initial support and $1850 likely being strong resistance.
Bitcoin
Bitcoin is lower following a risk-off tone on Wall Street after another impressive jobless claims reading sent Treasury yields surging. We got to be close to the bottom, so this might not have much follow through unless we have further signs the economy refuses to break. Bitcoin’s trading range continues to hold and any breaches of the $21,500 to $25,000 zone might be temporary unless a major crypto event occurs.