LONDON, Jan 3 (Reuters) – The dollar headed for its biggest one-day gain in three months on Tuesday, while stocks rose in a macro-packed week that could provide guidance on when and at what level U.S. interest rates will be raised. can be peak.
The MSCI All World index (.MIWD00000PUS) was largely unchanged, although European shares climbed to two-week highs on big gains in everything from financials to oil and gas stocks to health care.
Typically, stocks tend to fall when the dollar appreciates, but that negative correlation between the two softened on Tuesday, falling to its weakest level since early September. The dollar index last increased by 1% to 104.69.
The euro was the worst-performing currency against the dollar, falling the most since late September, thanks to government measures that included natural gas bills for households and businesses, after German regional inflation data showed consumer price pressures eased sharply in December. .
This week’s US payrolls data is expected to show the labor market remains tight, while EU consumer prices may show a slight slowdown in inflation as energy prices ease.
“Energy base effects will lead to a significant reduction in inflation in major economies in 2023, but stickiness in key components, much of which stems from tight labor markets, will prevent early dovish policy by central banks,” the analysts said. NatWest Markets wrote in a note.
They expect interest rates to reach 5% in the US, 2.25% in the EU and 4.5% in the UK and remain there throughout the year. On the other hand, markets are pricing in a rate cut for the end of 2023, with federal funds futures hovering between 4.25% and 4.5% through December.
“What frustrates me this year is that we still don’t know the full impact of the very significant monetary tightening that has taken place in the developed world,” said Callum Pickering, chief economist at Berenberg.
“It takes a good year or 18 months for the full effect to kick in,” he said.
As consumers struggle to keep up with the rising cost of living and companies run out of room to protect profitability by raising their prices, central banks have expressed concern about rising wages.
But, Pickering said, the labor market tends to lag the broader economy for some time, meaning there is a risk that central banks could raise interest rates more than the economy can bear.
“What central banks are driving is essentially hyper-cyclicality, meaning they over-stimulated in 2021 and created an inflationary boom, and then in 2022 they over-tightened and created a disinflationary recession. That’s exactly what you want central banks to do. it’s the opposite,” he said. .
Investors will get their first glimpse of the central bank’s thinking later this week after the Federal Reserve publishes minutes of its December policy meeting.
The minutes will likely show that many members see risks to longer-term interest rate hikes, but investors already know how much they’ve risen.
In markets, European stocks rose on gains in classic defensive sectors such as healthcare and food and beverages. Drugmakers Novo Nordisk ( NOVOb.CO ), Astrazeneca ( AZN.L ) and Roche ( ROG.S ) were among the biggest positive weights on the STOXX 600 (.STOXX), along with Nestle ( NESN.S ).
STOXX rose 1.1% after losing 13% in 2022. The FTSE 100 (.FTSE), the only major European index not trading on Monday, rose 1.3%.
US stock index futures gained between 0.4-0.5%, indicating a good start at the opening bell.
Markets had priced in the eventual US easing for a while, but the Bank of Japan’s shock upward shift in its ceiling for bond yields proved them very wrong.
According to the Nikkei, the BOJ is now considering raising its inflation forecasts in January to show price growth closer to its 2% target in fiscal years 2023 and 2024.
Such a move at the next policy meeting on January 17-18 will only add to speculation about an end to the ultra-loose policy that has been key to bond yields globally.
The policy shift boosted the yen, with the dollar depreciating 5% and the euro 2.3% in December.
The yen took a breather on Tuesday and fell 0.3% to 130.96 against the dollar. The dollar had earlier hit a six-month low of 129.52 yen. Against the dollar, the euro was down 1.1% at $1.05395, down as much as 1.4% earlier in the day.
“One theme we see often is the euro’s negative seasonality in January, which has averaged a 1.3% decline in January since 1980 and a 64% hit rate. If history is any guide, it’s tough for euro longs. a month,” Nomura strategist Jordan Rochester said.
Oil succumbed to the dollar’s strength and retreated as concerns about demand in China, the world’s second-largest economy, accelerated the decline.
China’s factory activity fell at its sharpest pace in nearly three years as COVID infections swept through production lines, a group of surveys showed.
“China is entering the most dangerous weeks of the pandemic,” warned analysts at Capital Economics.
Brent crude oil fell 0.9% to $87.00 per barrel, trading at $85.15 per barrel.
Reporting by Wayne Cole; Edited by Bradley Perrett, Sam Holmes, and Chizu Nomiyama
Our standards: Thomson Reuters Trust Principles.