Morning Commentary: Have We Priced in Enough Negative News?

Foreign Exchange - Morning Commentary

Have We Priced in Enough Negative News?

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Equity markets and interest rates have been in a high state of anxiety and apprehension about how much the U.S. and global economy will slow down creating enormous changes in interest rate expectations along with heightened volatility. The U.S. yield curve has flattened or inverted over the past week pricing in an expected slower 2019 U.S. economy. Also fitting into this high emotion, today’s U.S. November Jobs report showed a disappointing NFP gain of 155,000 against expectations of 198,000 with some downward revisions to previous months (further details below).
A sane person would have expected a further sharp drop in U.S. interest rates and equities today based on what we have witnessed over the past week or so. U.S. interest rates are nearly unchanged on the news as it appears we have priced in enough negative news for now. Equity markets also appear to be making an effort to stabilize, and for those that follow the U.S. dollar (DXY) index, the DXY index has been trapped in the same volatile and whippy range over the past seven days. The DXY index has largely ignored all the extreme moves in interest rates and equities leaving fx participants sidelined.
While today’s jobs report was disappointing, it would seem to appear that we have priced in enough negatives for now. Markets will remain on edge and volatility will continue to remain high as there are just too many short, medium, and long term factors creating uncertainty. But in the short run, I think we will see some near term stability in many of the asset classes as the markets have gotten too pessimistic.
  • The U.S. November Jobs report showed the UR rate unchanged at 3.7% despite the NFP disappointment. Average hourly earnings grew only by 0.2% keeping the YoY rate unchanged at 3.1%. Labor force participation rate remained unchanged at 62.9%. U.S. interest rates are flat on the session. According to Bloomberg, market expectations for a Fed rate increase on December 19 remain near 70%.
  • The Canadian dollar is one of the top performing currencies today given a double jolt of higher oil prices (OPEC cutback on supply) and a super strong November Jobs report. Canada created 94,100 jobs against expectations of a gain of only 10,000; full time jobs gains totaled a very impressive 89,900 gain. The UR fell from 5.8% to 5.6% and the labor force participation rate rose from 65.2 to 65.4.
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