US dollar rises as wage inflation, Biden Stimulus Pledge Boosts Fed Outlook

US DOLLAR, PAYROLLS, FOOD, INFLATION, INCOME, CHINA CPI – SPEAKING POINTS:

• US dollar rises as wage inflation rises and Biden’s stimulus pledge increases yields
• A steeper yield curve and wider rate spreads speak to the Fed’s shift in outlook
• Weak China CPI data may moderate risk slope in Asia-Pacific trade

The US dollar rose in the wake of the December labor market report on Friday. Although the printed payroll disappointed, showing that the economy cut 140,000 jobs last month, instead of adding 71,000 as projected by economists, wage inflation unexpectedly peaked at 5.1 percent for the year.

Revealingly, the markets responded to the launch with what appeared to be a shift from pacifist extremes in Fed policy expectations. The slope of the US Treasury yield curve (10a-2a) increased along with the spread between the yield of US benchmark for 10 years and an average of the main alternatives. Gold prices plummeted.

Traders may have reasoned that the fiscal stimulus received will support employment – making December payrolls a little out of date – while price growth may only accelerate further. This could most definitely bury the prospects for additional monetary accommodation, at least in the short term.

Chart created with TradingView

Wall Street struggled against that scenario, but stocks soared at the close, with President-elect Biden promising to outline plans for another fiscal stimulus on Thursday this week. The optimistic comments by Fed Vice President Clarida, talking about the possibilities for recovery in 2021, probably also helped.

SOFT CHINESE INFLATION DATA CAN ANGLE FINANCIAL MARKETS

This burst of optimism does not appear to be spreading to the beginning of Asia-Pacific trade as markets return from the weekend. The Bellwether S&P 500 futures are pointing down and Australia’s ASX 200 started the day on the defensive. Rising incomes may well be the culprit. Japan is closed for holidays.

Chinese CPI data for December is the title of a basic economic calendar. The inflation rate in relation to the previous year is expected to record stable (0.0%), marking a cautious recovery from the contraction of -0.5% in November. Recent readings of price growth tend to surprise on the downside, warning that more of it may be ahead.

Markets may celebrate a lower than expected CPI impression if it materializes, moderating the pressure to reduce risk. Investors can recognize that such a result gives PBOC more room to expand its own stimulus efforts, particularly as financial conditions in the world’s number two economy appear somewhat restrictive.

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— Written by Ilya Spivak, APAC chief strategist at DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on twitter