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The DXY Index rebounded by 0.4% to 108.69 after two days of selling. US data surprises dampened Fed cut expectations, sending the US Treasury 10Y yield higher a third day by 5.5 bps to 4.685%, its highest level since April 2024. US JOLTS job openings increased a second month to 8098k in November, defying expectations for a decline to 7740k from October’s 7839k (revised up from 7744k). However, the ISM Services employment index met expectations with a moderation to 51.4 in December from 51.5 in November.
Unless today’s ADP employment and initial jobless claims surprises, expectations should remain for Friday’s nonfarm payrolls to slow to 163k jobs in December from 227k a month earlier. Even so, investors were spooked by inflation worries, driven by the ISM Services prices paid index rising above 60 for the first time since January. The S&P 500 Index plunged by 1.1% to 5909, while the Nasdaq Composite Index shed 1.9% to 19490. Today’s FOMC minutes will be a reminder of the Fed’s cautious approach to rate cuts this year.
EUR/USD depreciated 0.5% overnight to 1.0340 after failing to push above 1.04 on Monday and Tuesday. While interest rate futures do not see the Fed cutting rates in the first quarter, the OIS market has priced in a cumulative 75 bps of cuts over the European Central Bank’s first three meetings this year. This divergent policy outlook was best reflected in the worsening negative yield differential between the EU and US 10Y bonds to 220 bps from 150 bps over the past four months. Although the EU 10Y bond yield did not buck rising US yields, it remained low at 2.48% amid new worries for the UST 10Y yield to push above April’s 2024 high of 4.704% towards the 5% level seen in October 2023. Unlike Trump’s first year in 2017, when the Eurozone’s growth rebounded to 2.8% from 1.8%, growth is likely to stay low at 1% in 2025 vs. a projected 0.8% last year. Not surprisingly, there is now more urgency for EU reforms amid mounting geopolitical pressures (US unpredictability under Trump, Russia-Ukraine war, China’s competitive exports), economic challenges (green transition costs, fiscal fragmentation, lagging competitiveness), and internal political strains (populism, migration, demographic shifts, the rise of far-right political parties).
US President-elect Donald Trump’s news conference yesterday was a wake-up call, countering Monday’s unfounded optimism that his tariff policies will be more measured than initially feared. Trump expressed intentions to acquire Greenland from Denmark and regain control of the Panama Canal for national security reasons and proposed renaming the Gulf of Mexico to the Gulf of America. He reiterated his idea of Canada becoming the 51st US state and his threat to impose tariffs on Canada and Mexico. Trump warned that all hell would break loose in the Middle East if Hamas did not release Israeli hostages in Gaza by his inauguration on January 20. He pledged to reverse the current offshore drilling ban to boost domestic energy production. Overall, Trump’s statements implied a more assertive foreign policy agenda, significant shifts in trade relations, and a focus on energy independence aligned with his America First agenda.
Quote of the Day
“Don't watch the clock; do what it does. Keep going.”
Sam Levenson
January 8 in history
Sophie Germain became the first woman to win a prize from the Paris Academy of Sciences for her paper on elasticity in 1816.
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