LONDON, Jan 3 (Reuters) – The dollar was on course for its biggest one-day gain in three months on Tuesday, while equities rallied in a packed macro week. which can provide guidance on when, and at what level, US interest rates will rise. maybe suddenly.
The MSCI All-World index (.MIWD00000PUS) was unchanged, although European stocks, led by big gains in everything from money, oil and gas stocks, healthcare, jumped to the double.
In general, stocks fall when the dollar gains, but the negative relationship between the two weakened on Tuesday to the weakest since the beginning of September. The dollar index rose 1% to 104.69.
The euro was the worst against the dollar, falling the most since late September, after German inflation data showed consumer prices fell sharply in in December, due in large part to the government’s measures to set natural gas bills for households and businesses. .
This week’s US payrolls data is expected to show that the labor market remains tight, while EU consumer prices are likely to show a drop in prices as prices are relatively cheap. of energy.
“The impact of the energy crisis will bring a significant reduction in the cost of living in the major economies in 2023, but the impact of the main components, most of which will come from the labor market tight, will prevent an early dovish policy ‘pivot’ from the central bank,” NatWest Markets wrote in a note.
They expect interest rates to rise to 5% in the US, 2.25% in the European Union and 4.5% in Great Britain and stay there for the whole year. The market, on the other hand, is pricing in a rate cut at the end of 2023, with the Fed funding future implying 4.25 to 4.5% of the month of December.
“The thing that scares me this year is that we still don’t know the impact of the very significant monetary tightening that has taken place across the developed world,” said Berenberg senior economist Kallum Pickering.
“It takes a good year, or 18 months, for the full effect to kick in,” he said.
The central bank has expressed concern about rising wages, even as consumers struggle with inflation and businesses run out of room to protect profits by raising prices.
But, Pickering said, the labor market tends to lean against the broader economy at times, meaning there is a risk that the central bank could raise interest rates more than the economy.
“What central banks are doing is extreme cyclicality, that is – they increase significantly in 2021 and cause inflation and then decrease significantly in 2022 and cause disinflation. It’s the exact opposite. it’s what you want the central bank to do,” he said. .
Investors will get their first glimpse of the central bank’s thinking later this week when the Federal Reserve releases minutes from its policy meeting.
The minutes may show that many members saw the danger that interest rates should rise longer, but investors feel the amount of their increase.
In the market, the European share rose due to the gains in the traditional security sectors, such as medicine and food and beverages. Drugmakers Novo Nordisk ( NOVOb.CO ), Astrazeneca ( AZN.L ) and Roche ( ROG.S ) are among the best-weighted in the STOXX 600 (.STOXX), along with Nestle ( NESN .S)
The STOXX, which lost 13% in 2022, rose 1.1%. The FTSE 100 (.FTSE), the only major European index not to trade on Monday, rose 1.3%.
US stock futures rose between 0.4-0.5%, pointing to a positive start at the opening bell.
Markets have priced in the short term on the eventual easing of the United States, but they were misled by the shock of the Bank of Japan rising to the ceiling for funding.
The BOJ is now considering raising its inflation forecast in January to show price growth closer to its 2% target in 2023 and 2024, according to the Nikkei.
Such a move at the next policy meeting on January 17-18 will help determine the end of the extremely bleak policy, which is set as a floor for global financing.
The policy change boosted the yen across the board, with the dollar losing 5% in December and the euro 2.3%.
The yen weakened on Tuesday, losing 0.3% against the dollar to 130.96. The dollar earlier touched a six-month low of 129.52 yen. Against the dollar, the euro fell 1.1% to $1.05395, after falling as much as 1.4% earlier.
“One theme that we often notice is the negative seasonality of the euro in January, down around 1.3% since 1980 on average in January, with a rate of 64%. If history seems to be any guide, it was a difficult month for euro longs, “Nomura. said strategist Jordan Rochester.
Oil was hit by the strength of the dollar, and reversed course, falling as concerns about demand in China, the world’s second-largest economy, added to the slump.
A series of surveys have shown that factory activity in China is shrinking at the fastest pace in nearly three years as the COVID-19 virus spreads through production lines.
“China is entering its most dangerous week for the epidemic,” warned analysts at Capital Economics.
Brent crude lost 0.9% to trade around $85.15 a barrel, after reaching a session high of $87.00 earlier.
Reporting by Wayne Cole; Writing by Bradley Perrett, Sam Holmes and Chizu Nomiyama
Our Standards: The Thomson Reuters Trust Principles.
