At the start of the trading week, markets are lacking new drivers that could provide meaningful direction. Last week, US labor market data failed to provide any clarity. US NPF recovered to 196k from ultra weak 20k prior read while wage growth decelerated to 3.2% from 3.4%. Overall, the report provides no guidance into the pace of the US economic slowdown or potential direction of the Fed. Payrolls suggest that peak is behind us, and wages marginally weaker, it’s likely the Fed will hold current dovish bias. We don’t see this week’s CPI read changing this outlook. The Fed will want to see clear evidence of inflation acceleration before shifting direction again. The lack of a clear signal also means that solid manufacturing data and domestic auto sales combined with strong employment growth will produce moderate US growth. Baring a “shock” (political chaos, trade war etc.) we caution against deducing yield curve inversion as recessionary. It more likely given the data flow that growth will stabilize in 1Q and improve in 2Q. USD longs, and Euro shorts are increasing according to CFTC data. This trend indicates the markets are settling in for a period of wide US yields differential against G10, low volatility, and steady stock prices. We don’t expect USD strength to dissipate anytime soon give the uncertainty in Europe and UK.
By Peter Rosenstreich