- Global stocks rise, but Wall Street falls
- The correlation with the dollar is softening
- The yen is taking a breather from the recent rally
LONDON/NEW YORK, Jan 3 (Reuters) – The dollar rose on Tuesday as oil prices fell while US stocks defied a global stocks rally in a week of macros that could offer a clue as to when and where the US -Interest rates could peak.
The MSCI All-World Index (.MIWD00000PUS) fell 0.2%, weighed down by losses in US stocks. The Dow Jones Industrial Average (.DJI) ended little changed, the S&P 500 (.SPX) fell 0.4% and the Nasdaq Composite (.IXIC) lost 0.76%.
Losses in US stocks were led by a 12.2% plunge in electric vehicle maker Tesla (TSLA.O) after it missed Wall Street estimates for quarterly deliveries. iPhone maker Apple Inc (AAPL.O) fell 3.7% to its lowest level since June 2021 after a rating downgrade amid production cuts in China.
The US dollar strengthened ahead of the release of minutes from the Federal Reserve’s latest meeting on Wednesday, on expectations that it will signal further monetary tightening is imminent.
A higher dollar weighed on oil prices, which were also hurt by concerns about slowing global economic growth, particularly after data showed China’s factory activity contracted in December.
“We expect December’s FOMC minutes to shed additional light on Fed officials’ policy views for 2023. Note that the committee at the meeting signaled broad expectations for a significantly higher terminal rate this year,” analysts at TD Securities said in a note.
The dollar index rose 0.94% to 104.64.
The euro was the worst-performing currency against the dollar, falling the most since late September after regional German inflation data showed consumer price pressures had eased sharply in December, in large part due to government action to contain natural gas bills for households and businesses was .
This week’s US jobs data is expected to show that the job market remains tight, while EU consumer prices could show some slowdown in inflation as energy prices soften.
“Energy base effects will lead to a sizeable fall in inflation in major economies in 2023, but stickiness in core components, largely due to tight labor markets, will prevent early central bank ‘pivoting’,” analysts at NatWest Markets wrote in a note.
They expect interest rates to be 5% in the US, 2.25% in the EU and 4.5% in the UK and to stay there throughout the year. Markets, on the other hand, are pricing in rate cuts in late 2023, with Fed Fund futures implying a range of 4.25% to 4.5% through December.
“What makes me nervous about this year is that we still don’t know the full impact of the very significant monetary tightening that has taken place in the advanced world,” said Berenberg Senior Economist Kallum Pickering.
“It takes a good year or 18 months to see the full effect,” he said.
Central banks have expressed concern about rising wages, even as consumers struggle to keep up with the rising cost of living and companies are running out of room to protect profitability by raising their own prices.
However, according to Pickering, the labor market tends to lag the broader economy for some time, which means there is a risk that central banks could raise interest rates more than the economy can handle.
“Essentially what central banks are inducing is excessive cyclicality, that is – they overstimulated in 2021 and triggered an inflationary boom, and then tightened too much in 2022 and triggered a disinflationary recession. It’s the exact opposite of what you expect central banks to do,” he said.
EUROPEAN EQUITY RALLY
In the markets, European equities rose on gains in traditionally defensive sectors such as healthcare and food & beverage. Drug makers Novo Nordisk (NOVOb.CO), Astrazeneca (AZN.L) and Roche (ROG.S) were among the top positive weights in the STOXX 600 (.STOXX), along with Nestle (NESN.S).
The STOXX, which lost 13% in 2022, rose 1.2%. The FTSE 100 (.FTSE), the only major European index not trading on Monday, rose 1.4%.
Markets have been pricing in eventual US easing for some time but have been caught on the wrong foot by the shocking upside move by the Bank of Japan to the bond yield cap.
The BOJ is now considering raising its inflation forecasts in January to show price growth close to its 2% target in FY2023 and FY2024, according to the Nikkei.
Such a move at its next monetary policy meeting on Jan. 17-18 would only add to speculation about an end to the ultra-loose policy that has essentially served as a floor for bond yields around the world.
The change in course has boosted the yen across the board, with the dollar down 5% and the euro down 2.3% in December.
The yen took a breather on Tuesday, falling 0.3% against the dollar to 130.895. The dollar had previously touched a six-month low of 129.52 yen.
Oil suffered from dollar strength and concerns over demand in China, the world’s second largest economy, added to the downside momentum.
A series of surveys have shown that China’s factory activity contracted the most in nearly three years as COVID infections swept through production lines.
“China is entering the most dangerous weeks of the pandemic,” warned analysts at Capital Economics.
Brent crude fell 4.2% to settle at $82.10 a barrel.
Reporting by Koh Gui Qing in New York and Amanda Cooper in London Additional reporting by Wayne Cole in Sydney Editing by Andrea Ricci and Matthew Lewis
Our standards: The Thomson Reuters Trust Principles.
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