Market Overview

U.S. Dollar Receives Support From Data, PCE Inflation in Focus

  • US jobless claims and GDP data help the dollar
  • Core PCE inflation the next focal point
  • Wall Street comes back under pressure

Dollar rebounds on low jobless claims and upwardly revised GDP

The US dollar rebounded against almost all its major peers yesterday. It failed to gain against the yen, but it is doing so today.

What may have added some fuel to the dollar’s engines were the lower-than-expected initial jobless claims for last week and the upside revision of the GDP for Q3. The data may have convinced some traders that the Fed may after all need to raise rates higher and for longer. However, the consensus has not changed much. Investors somewhat lifted the level of where they expect interest rates to peak, but they still see it below the Fed’s own projection, while they are still seeing 50 basis points worth of rate cuts by the end of 2023.

The reason why market participants have not dramatically altered their bets about the Fed’s future course of action may be the details of yesterday’s data, but also their preference to focus on more updated information with regards to economic growth. The number of Americans filing new claims for unemployment increased by less than expected last week, suggesting a still-tight labor market, but continuing claims remain at highs not seen since January. As for the revision in GDP, it was due to upgrades in consumer spending and business spending, but with the slide in the housing market being deeper than previously estimated.

This means that the risks of a recession in the US next year have anything but disappeared. On Tuesday, the Atlanta Fed GDPNow model estimated an economic growth of 2.7% qoq SAAR for Q4, but it forecasted a 21.5% plunge in residential investment, and this was before the release of existing home sales for November, which pointed to the tenth consecutive and a deeper-than-expected slide. The Atlanta Fed will release its new estimate for Q4 today.

Core PCE inflation to corroborate Fed pivot bets
Apart from that, today’s agenda also includes the core PCE index for November, which is accompanied by the personal income and spending data for the month. Durable goods orders for the same period are also on tap.

Although none of these releases is a major market mover, they still amount to new information on the US economy. Durable goods orders are expected to have slid, while income and spending are forecast to have slowed. The core PCE inflation is seen slowing to 4.7% y/y from 5.0%. This would be in the same direction as in the core CPI rate for the month, but at lower levels. While the CPI numbers are the ones to move the market, the PCE metrics are the ones more closely watched by the Fed.

Thus, a slowdown in the core PCE to 4.7% could very well allow market participants to maintain their Fed pivot bets. This is unlikely to let the greenback make a strong comeback and climb back close to its multi-decade highs hit in September. Some further recovery due to holiday-thin liquidity next week is not unlikely, but with the next piece of information adding to the narrative of cooling inflation, the currency might resume its latest tumble.

Wall Street resumes its slide, risks still to the downside
Yesterday’s better-than-expected US data prompted investors to abandon equites, due to fears that the Fed may take interest rates higher. This suggests that positive data could still prove negative for stocks, but recently, the opposite was also true. Numbers that amplified fears of a recession in the US, like the latest PMIs and retail sales, resulted in equity selling as well.

Therefore, the risks for stocks may still be tilted to the downside. The likelihood of further declines is highlighted by the technical picture as well. The S&P 500 came under renewed pressure from below the key zone of 3920, which currently coincides with the 50- and 100-day exponential moving averages, while in the bigger picture, the index remains below the downtrend line drawn from its record high, hit back in January.


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