Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 04 February 2018
Volatility catalyzed by strong data and political uncertainty
Last week saw the continuation of strong U.S. economic data contrast with more evidence of a dysfunctional political environment in Washington ultimately making for turbulent financial markets. The yield on U.S. 10-year government bonds rose sharply on Friday to reach 2.84%, while equities sank with the Dow dropping 666 points. The USD’s reaction was not uniform, remaining weak against the EUR but recovering against the JPY and GBP. The environment is likely to remain volatile in the near future as the markets attempt to gauge how serious the inflation impulse is likely to be following the sharper than expected rise in average hourly earnings, and also what will be the Fed’s response.
The U.S. January employment report was the trigger for substantial losses on Wall Street, with equity markets plunging while bond yields soared. The Dow saw its biggest sell-off ever on Friday, while it also lost over 4.0% over the week as a whole, for its worst weekly performance in two years. While the payroll growth of 200k was solid, with the unemployment rate unchanged at 4.1%, the surprise factor was the 0.3% m/m increase in hourly earnings which helped to catapult the y/y rate up to 2.9% from an upward revised 2.7% in December. This led to concerns that the Fed might accelerate its pace of monetary policy tightening, and not surprisingly the messages from Fed officials were relatively hawkish. In this respect the weakness reflects the fact that equities could not continue ignoring rising bond yields forever.
Source: Emirates NBD Research, Bloomberg
Global markets under strain