Early Morning Call: dollar index trades near 1-month high ahead of NFPs

Equity market overview

After APAC equity markets, European indices are on track to end the first week of 2023 in the green, while US indices are likely to record a weekly loss.

Yesterday the FTSE 100 outperformed other main indices in the region, boosted by its retail stocks on the back of better-than-expected sales reports.

Macro overview

French European Central Bank (ECB) policymaker and governor of the Bank of France, François Villeroy de Galhau, said yesterday that the ECB interest rates should reach a peak by this summer. Since July, the ECB has delivered four successive rate hikes.

In his New Year's address, Villeroy de Galhau said "It would be desirable to reach the right 'terminal rate' by next summer, but it is too early to say at what level", and added that the ECB needs to be "pragmatic and guided by observed data, including underlying inflation, without fetishism for increases that are too mechanical."

In the US, James Bullard said yesterday that the new year could finally bring relief from inflation. For the St. Louis Federal Reserve (Fed) leader, the Federal Open Market Committee (FOMC) "has taken aggressive action during 2022, with ongoing increases in the policy rate planned for 2023, and this has returned inflation expectations to a level consistent with the Fed's 2% inflation target."

Bullard is of the opinion that "During 2023, actual inflation will likely follow inflation expectations to a lower level as the real economy normalises." Note that Bullard will not hold a voting role on the FOMC this year due to the annual rotation of regional Fed leaders on that panel.

A Reuter's poll meanwhile reveals that economists think the dollar's grip on FX markets will loosen a bit this year. Last year, the dollar had its best performance since 2015, rising against almost every currency. This year could be different, as a majority of forex strategists expect most major and emerging currencies to post marginal gains against the greenback over the coming 12 months. EUR/USD was down nearly 13% last year. Currency strategists surveyed expect the pair to only recoup around a third of those losses in a year.

The Japanese yen took a beating last year, losing as much as a fifth of its value. The Bank of Japan (BoJ)'s surprise tweak to its bond yield curve control sent the yen the other way, but it still ended the year 12% lower against the dollar. It is expected to gain around 4% against the greenback by the end of 2023.

In the UK, Halifax house price index declined by 1.5% in December month-on-month (MoM). Year-on-year (YoY), the index rose by 2% in December, after an increase of 4.6% the previous month.

In Germany, factory orders fell by 5.3% in November MoM, well short of expectations of a 0.5% decline. Retail sales dropped by 5.9% in November YoY, after -5% the previous month.

Later this morning Eurozone consumer price index (CPI) is expected to increase by 9.7% in December YoY, after 10.1% in November. Retail sales are forecast to fall 3.3% in November YoY, after -2.7% the previous month.

Then at 1.30pm, it's December non-farm payrolls (NFPs). The market anticipates 200,000 job creations. The unemployment rate should remain at 3.7%, and average hourly earnings are forecast to rise by 5% YoY.

ISM non-manufacturing PMI is expected to fall to 55 in December, from 56.5 the previous month, and factory orders are forecast to fall by 0.8% in November MoM, after a rise of 1% in October.

Equities

Standard Chartered hit a near-three-year high yesterday in session, rising as much as 20%, before paring its gains. It all started with Bloomberg reporting that First Abu Dhabi Bank (FAB), the United Arab Emirates' biggest lender, was exploring an offer for Standard Chartered as part of a plan aimed at building an emerging markets bank. Shortly after the report, FAB confirmed in a statement that it had been considering a bid, but added it was no longer pursuing a potential deal.

Bed Bath & Beyond shares lost 30% after the group announced it was exploring options including a bankruptcy filing to address the US home goods retailer's plunging sales, dwindling cash and debt load.

Silvergate shares tanked by 42% yesterday, as the group revealed that clients pulled $8.1 billion in deposits during a "crisis of confidence" late last year, forcing the crypto-focused US bank to sell assets and underscoring how the implosion of FTX reached the regulated financial sector. Coinbase lost 11% yesterday.