USD vs S&P 500 chart

Before The Bell: US Dollar Continues to Invert As Inflation Anticipated

The dollar’s correlative pattern with stock markets has inverted, with the currency now rising in step with rallying global stock markets. The catalyst for the change was the Democrat wins in the Georgia runoff elections, which heralds the prospect of much greater deficit spending and warranting higher growth expectations for the U.S. economy. U.S. Treasury yields have also spiked more than peers, and much more so in the case against JCB and Bunds, which appears to have offset implications for lower real interest rates and real yields from an anticipated higher inflation curve.

In markets today, the Stoxx 600 European index hitting new 11-month highs, while the MSCI Asia-Pacific equity index posted a fresh record higher and Japan’s Nikkei a 30-year peak. U.S. equity futures rose moderately after the main cash indices posted fresh record highs yesterday on Wall Street.

Front-month WTI oil prices hit a new 11-month high, at $51.33. In the forex realm, the DXY dollar index posted a 10-day high at 90.13, while EUR-USD etched out a four-day low at 1.2214 and USD-JPY lifted to a 24-day peak at 104.09. Cable bucked the trend amid pound outperformance, which recouped the moderate losses seen earlier in the week, The pair lifted to highs just above 1.3600, up from the 10-day low the pair saw yesterday at 1.3532. The dollar bloc currencies remained in relatively narrow ranges in a consolidating pattern under the 33-month highs that were seen against the U.S. dollar earlier in the week. Bitcoin stormed to yet another record high, this time above 40,000.

The cryptocurrency is up by over 380% since last September, which has come amid a growing sense that the new asset class is becoming of age, being more accepted by institutional investors and competing with gold as an inflation hedge.

The U.S. December nonfarm payroll report is up today. We’re forecasting a 100k increase but see risk for a decline as suggested by the 123k drop in the headline ADP report. We see the unemployment rate ticking up to 6.8% from 6.7%. Earnings should edge up 0.2%. The market is likely to be less sensitive to unexpected weakness than to unexpected strength, as the prospect for increased stimulus and a vaccination-assisted route out of the pandemic would curtail the impact of any bad news in the payrolls report.

One thing to be aware of is that UK scientists have expressed concern that the current vaccines may not be effective in protecting against the new ‘South Africa’ variant of Covid. Incoming data on this will throw better light on this over the coming weeks. Any verifiable signs that vaccinations prove ineffective against new strains would be majorly dispiriting for investors.

The focus will turn to the December nonfarm payroll report. We’re forecasting a 100k increase but see the chance for a decline as suggested by the -123k drop in the headline ADP report. We see the unemployment rate ticking up to 6.8% from 6.7%. Earnings should edge up 0.2%. Also slate are November wholesale trade numbers and consumer credit. Fed VC Clarida speaks.

Scroll to Top