A look at the day ahead in European and global markets by Stella Qiu
Most stocks in Asia were lower on Friday, after Wall Street futures led, ahead of a key payrolls report, which could further push up government bond yields and the US dollar.
Both Nasdaq futures and U.S. futures fell 0.3%, after US trading was closed overnight for former President Jimmy Carter’s funeral. European stock markets seem poised for a flat open.
This likely reflects anxiety in global bond markets. The benchmark is just below an eight-month high of 4.73% and threatens a chart high at 4.739%. The 30-year yield climbed 11 basis points this week to its highest level in more than a year.
British government bond yields jumped to their highest since 2008 as investors weighed the country’s fiscal outlook, although they have eased somewhat for now.
Even Chinese bond yields rose on Friday, after the country’s central bank said it would temporarily suspend purchases of government bonds. The reason offered was a paper shortage, but analysts suspected it was aimed at propping up the yuan.
Much now depends on the payrolls report, where median forecasts favor a gain of 160,000 jobs in December with the unemployment rate at 4.2%.
Forecasts lie in a relatively tight range of 120,000 to 200,000, suggesting more room for outside surprise. There is an additional error from the annual reanalysis of the household survey, which could see a revised decrease in the unemployment rate for previous months.
The surprisingly strong report is likely to push 10-year yields above 4.739%, with bears eyeing the psychologically important 5% level, the highest seen since 2007.
That would strengthen the already powerful US dollar, which is near two-year highs and wreaking havoc on emerging markets.
The reaction in the stock market could also be negative, with high valuations now challenged by rising term premiums and higher discount rates.
So investors might be better off praying for a soft report, but not so soft that it threatens the goldilocks scenario for the US economy.
On the other hand, it would probably need to be an extremely weak report to move the dial on a Fed rate cut, given that investors and the Fed are now more focused on how Trump’s policy may play out over the next few months.
Markets have already returned to just 43 basis points of easing this year, the equivalent of less than two rate cuts, with the first of those not fully factored in until June when the potential impact of Trump’s proposals becomes clearer.
On the foreign exchange market, the dollar is enjoying its sixth consecutive week of growth. The British pound underperformed, falling 1% to $1.2303, the lowest in more than a year.
A host of Fed officials spoke overnight and agreed there was no rush to cut interest rates.
Key events that could affect the markets on Friday:
— French industrial production for November
— US nonfarm payrolls report for December
