US Dollar Above Wage Inflation, Biden Stimulus Pledge Drive Fed Outlook

US DOLLARS, PAYROLLS, FED, INFLATION, YIELDS, CHINA CPI – TALKING POINTS:

• US dollar rises as wage inflation increases, Biden stimulus promise increases yields
• Rising Yield Curve, Rising Price Spreads Address Fed Fed Shift
• Poor Chinese CPI data could mitigate risk aversion in trade in Asia and the Pacific

The US dollar rose following the December labor market report on Friday. While the main wage states were disappointed and the economy declined 140,000 jobs last month instead of adding 71,000 as predicted by economists, wage inflation unexpectedly rose to a seven-month high of 5.1 percent.

Telling that the markets responded to the release with a shift from the devilish extremes of the Fed policy expectations. The slope of the U.S. Treasury yield curve (10 – 2 years) increased along with the spread between the standard U.S. yield for ten years and an average major alternative. Gold prices have fallen.

Traders may have argued that the incoming fiscal stimulus would support employment – which would push the December payroll somewhat dated – while price growth might just accelerate further. This could definitely bury the prospects for additional monetary accommodation, at least in the short term.

Graph created with TradingView

Wall Street struggled against this backdrop, but shares roared higher until the end when President Biden promised to lay out plans for further fiscal stimulus on Thursday this week. Striking remarks from Fed Vice President Clarida, who addressed the room for recovery in 2021, probably also helped.

SOFT CHINESE INFLATION DATA COULD CLOSE FINANCIAL MARKETS

The outburst of optimism does not seem to be conveyed in early trade in Asia and the Pacific as markets return from the weekend. The future of Bellwether S&P 500 shows lower and the Australian ASX 200 started the day in defense. Rising returns could possibly be the culprit. Japan is closed for a holiday.

December’s Chinese CPI data contains an economic calendar for barebones. The year-on-year inflation rate appears to be (0.0%), indicating a cautious recovery from the -0.5% contraction in November. Recent price growth readings have tended to surprise the downside, and more of that can be warned.

Markets can promote a lower-than-expected CPI footprint if realized, which will moderate the risk-down footprint. Investors can count on such an outcome giving the PBOC more room to expand its own stimulus efforts, especially as financial conditions in the world’s number two economy seem somewhat restrictive.

FX TRADING RESOURCES

— Written by Ilya Spivak, Chief APAC Strategist for DailyFX.com

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