Daily Wrap Up 7 January 2022

7 Jan 2022 04:22 PM

Stocks slide as yields rise 

The mood in the markets is downbeat following the announcement of the disappointing headline US non-farm payrolls report. The update showed that 199,000 jobs were added last month, and that surprised traders seeing as the consensus estimate was for 426,000 jobs to have been added. It wasn’t all bad news, as the November report was revised up from 210,000 to 249,000. In addition to that, the unemployment rate dropped to 3.9% - undershooting the 4.1% forecast. The jobless rate is now at its lowest mark since February 2020. It is possible the “great resignation” is the reason why the jobless rate keeps falling, despite the fact the last few non-farm payrolls reports were underwhelming. The unemployment rate takes account of individuals who are out of work but are actively looking for employment, while if an individual resigns to pursue education or perhaps set up their own business, they might be deemed to be outside the labour market.

Even though the headline non-farm payroll number was poor, the bond market took its cues from the jobless rate. The US 10-year yield pushed above 1.76%, its highest mark in almost two years. The rise in the yield indicates that bond traders are starting to anticipate a rate hike from the Federal Reserve in the months ahead. During the week, the minutes from last month’s Fed meeting were posted, and the update had a hawkish tone. Considering the falling unemployment rate, the US labour market is nearing full employment, and that adds weight to the argument the Fed might hike rates in the first half of the year. Stock markets are in the red in both Europe and the US due to the prospect of higher rates. The NASDAQ 100 is the underperformer of the American indices as technology stocks are coming under the most pressure amid the chatter of a potential rate hike.

Even though the US yields are rising, the US dollar index has fallen to a four-day low. Typically, the dollar and the 10-year yield are positively correlated, but that hasn’t always been the case since mid-December. The euro is enjoying a rally and that appears to be the main driver of the greenback. CPI in the eurozone hit 5%, the highest on record. Energy prices in the area jumped by 26% on an annual basis – which was a large factor in the rise in the cost of living. Gold is marginally lower today, which seems strange considering the US dollar and stocks are down. It speaks to a possible weakness in the gold market if it can’t rally on a day like today.

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