The dollar remains close to fresh highs on Thursday, the minor retracement was also reflected in revived modest demand for risk, the key Asian and European markets gain more than 1%. Demand for safe assets came pressure, investors dump long-term bonds of matured economies. Yield on 10-year Treasuries is once again targeting the 3% mark.Commodity markets saw surplus of buyers as well, key proxies for market fears of a future recession – oil and copper prices are up 1% and 3.5% today, respectively.The rally of risk assets today was basically sponsored by the minutes of the FOMC meeting released yesterday. There were lots of mentions about the need to lower inflation and little about possible costs of an aggressive policy, which prompted investors to revise the odds of a recession to the downside and began to roll back the emotional reaction of recent days. The minutes showed that the Fed is ready to hike interest rate above the neutral level if inflation proves to be persistent and that the commitment to the idea of suppressing inflation outweighs fears that this could significantly harm the economy.Another important source of information about the state of the US economy was the PMI in the services sector from ISM released yesterday. The headline figure was better than expected thanks to rebound in business activity sub-index, but other components of the report pointed to a decrease in hiring compared to the previous month, a slowdown in the growth of new orders and some slowdown in inflation:Given these data, there is a growing risk of disappointment with tomorrow’s NFP report, in particular, the payrolls figure could again miss estimates. As the Fed signaled it won’t be easily spooked with deterioration in the key macro data, worse than expected jobs growth will likely result in a new round of risk-off in the market, as this may rekindle worries about a policy mistake, i.e., policy tightening into economic slowdown.The strong dollar forces US trading partners to keep up with the hawkish Fed in order to contain further devaluation of their currencies, which is fraught with inflationary pressure coming from expensive imports. The European currency is moving towards parity against the dollar and it is likely that the ECB will soon have to hint at a more aggressive pace of rate hikes, as the risks of higher inflation figures in the coming months may begin to outweigh the risks of lack of monetary stimulus due to monetary tightening. However, EURUSD move towards 1.00 is likely to resume soon and the best candidates to trigger sales are this Friday’s labor market report and next week’s US inflation report.Today, the release of the ADP report is dye, to which the market is often very sensitive. Job growth is expected to be around 200K, an upside surprise will likely extend current rebound in risk-assets, while weaker-than-expected print may increase bearish sentiment in equities.
Source: Tickmill
