Markets Position for More Data

STOCK INDEX FUTURES

The indexes are mixed, with the Dow and S&P lagging while the Nasdaq is higher as traders assess NVIDIA’s new AI superchip platform and position themselves ahead of Friday’s labor data. Stocks moved higher to start the week on Monday, with the Dow hitting an all-time high, while the S&P and Nasdaq both ended higher, getting a lift from gains in tech, mining, and energy sectors as sentiment over potential investment opportunities in Venezuela was elevated. The geopolitical situation in Venezuela is likely to have little to no impact on capital markets, in part thanks to a seeming lack of potential escalation and for the fact that Venezuela’s economy is a non-player in the global marketplace, even with its oil production.

The energy sector little changed in premarket trading after surging yesterday following comments from President Trump, which floated plans for a US-led revival of Venezuela’s oil industry. However, the actuality of an immediate boost in oil production is negligible, while long-term US investment remains subject to regime developments. ISM’s Manufacturing PMI survey for December came in below expectations and showed that activity for the sector contracted for the tenth month in a row. A drop in production and inventories was responsible for the disappointing figure, while the survey also detailed that price pressures remained elevated but down from previous months.

Traders are looking ahead to a busy week of US economic data, highlighted by the December jobs report due Friday. But ahead of that, ADP private payroll figures, ISM Services PMI data for December, and the JOLTS Job Openings report are all set for release Wednesday and are likely to help shape interest rate cut expectations from the Fed.

CURRENCY FUTURES

US DOLLAR: The dollar is higher, recovering its losses from yesterday ahead of the S&P Global services PMI survey for December, which is expected to show a drop in activity. The dollar faced pressure on Monday following the release of ISM’s Manufacturing PMI survey, which showed that activity in the US contracted for the tenth month in a row. Notably, the prices index stabilized at 58.5, matching the last reading, and although elevated, remains well below levels seen in the March-June period, suggesting that initial tariff pressures have eased but remain persistent. Markets have shrugged off the Venezuela impact ahead of several key economic data releases out of the US this week. December’s nonfarm payrolls report will come Friday and offer a solid assessment of the labor market in a report that should be free from any shutdown-related impacts, giving markets a clear look into the health of the labor market. Ahead of that, JOLTS Job Openings, and ISM’s Services PMI survey will be released on Wednesday and will likely help posture investor positioning ahead of Friday’s report. Regarding ISM’s Services PMI survey, attention should be focused on the prices index as a leading indicator of inflation trends. Dollar direction is likely to be influenced by the prices index, alongside the headline PMI figure. Currently, markets are pricing a 16% chance of a rate cut at the January meeting, with a rate cut not fully priced in until the June meeting.

EURO: The euro is lower following data that showed French and German inflation figures came in below forecast, reinforcing the European Central Bank’s view that monetary policy is in a good place. Consumer prices rose 0.7% year-over-year in France, below a previous reading and forecasts for a reading of 0.8%. Meanwhile, prices in Germany rose 1.8% year-over-year in December; that is below November’s 2.3% and forecasts for 2.0%. Notably, for Germany, it was the first time the reading fell below the ECB’s 2% target since September 2024. The modest inflation figures in Germany were in part thanks to slowing goods inflation, a decline in energy prices, and slowing food price growth despite sticky services inflation. The euro’s strengthening in 2025 has had a disinflationary effect on prices, mainly tied to imports, in the eurozone, as the stronger currency has made foreign goods cheaper. Today’s inflation figures are unlikely to shape opinions at the European Central Bank for any near-term moves on monetary policy ahead of figures for Italy and the eurozone tomorrow. The ECB is likely to stay on hold for 2026 and most of 2027, as inflation is forecast to hover around the bank’s 2% target, while recent growth projections have been revised higher. Manufacturing data out of Germany on Thursday will also serve as a notable event for currency markets, as traders continue to assess the impact of higher US tariffs on the eurozone and, more specifically, export-reliant Germany. Given the seeming divergence between central bank policy, data out of the US this week will serve as the primary catalyst for moves in the euro.

BRITISH POUND: The pound is lower against the dollar as traders await key data out of the US this week in what is to be a relatively quiet week for the sterling. Recent strength in the pound has come from improved investor sentiment in Britain as easing worries about the UK’s fiscal position and hints that the UK is working on a closer relationship with Europe. Consumer credit and mortgage lending data for November, which showed that mortgage approvals fell less than expected and that there was an increase in consumer borrowing, came out on Monday and did little to move the currency, suggesting that traders will be focusing on data out of the US for moves in the sterling. The Bank of England lowered rates by 25 bps last month and is expected to deliver one more rate cut this year, although officials at the bank cautioned that the pace of easing could slow as the bank does not want to jump the gun on inflation. The recent rate cut brought a tight 5-4 vote, with BoE Governor Andrew Bailey offering the tie-breaking vote.  Money markets suggest the next rate cut could come in April or June, with the latter meeting being fully priced in for a cut.

JAPANESE YEN: The yen is little changed against the dollar, hovering close to the 157 level, and with no move from the Japanese government to intervene in the currency market over the holiday period, a move some analysts had been expecting. The Bank of Japan’s branch managers’ meeting will take place on Thursday, which will see the central bank release its regional economic report, similar to the Fed’s beige book. BoJ Governor Ueda reiterated that the bank will continue to raise rates if economic projections are met, language that he has used in the past that is largely being shrugged off by traders. However, there is growing confidence that Japan is in a good place to move into a more sustainable, growth-driven economy, but those hopes have done little to support the currency. The cabinet recently approved a 122.3 trillion yen budget, which aims to balance aggressive fiscal spending and debt management by curbing new bond issuance. However, Japan’s public debt is twice the size of the country’s economy, giving the government limited flexibility to implement further stimulus measures. These dynamics continue to present downside pressure against the currency; expectations that the BoJ will raise rates slower and more cautiously than expected have removed some near-term strength.

AUSTRALIAN DOLLAR: The Aussie is higher as a revival in risk sentiment helped lift the currency ahead of November’s CPI inflation report due Wednesday, which will be watched for signs of escalating inflation pressures in the country as traders speculate on the Reserve Bank of Australia’s next move. The RBA recently warned that inflation risks in the economy appear to be tilted to the upside, and traders have been speculating that the next move from the central bank is likely to be a raise in rates. Still, the central bank sees the monthly inflation figures as volatile and places greater emphasis on its quarterly inflation report, which is due in late January. A stronger-than-expected Q4 core inflation print is likely to support the case for a rate hike at the central bank’s March or May meeting, with market odds fully pricing in a rate hike at the latter. Building approvals data and some trade data for November are also due for release this week, which could offer some signals on economic momentum in the country. Recent figures showed that Australia’s economy grew 0.4% in the third quarter, up 2.1% from a year earlier.

INTEREST RATE MARKET FUTURES

Yields are higher across the curve after dropping yesterday as traders ready for further data that will provide clues on the state of the economy. Yesterday’s ISM manufacturing data saw traders flock to bonds despite a solid rally in the equities. However, government data will serve as the main catalyst for price direction in the bonds this week, as speculation over the timing and pace of interest rate cuts from the Fed remains a key factor in Treasury yield levels. Bonds appear to be little distracted by the developments in Venezuela over the weekend. A lack of spillover and further escalation alongside the decisiveness of the US operation seem to present minimal downside risks in regard to geopolitics.

December’s nonfarm payrolls report on Friday should be free from any shutdown-related impacts, giving markets a clear look into the health of the labor market. Ahead of that, JOLTS Job Openings, and ISM’s Services PMI survey will be released and will offer insights into the health of the US economy. Aside from the volatile nonfarm payrolls figures that have been published and a seemingly misleading jump in the unemployment rate (rounded up to 4.6%), the state of the labor market appears to be cooling, but not collapsing, a key distinction that will be important to monitor regarding Fed policy.

The most recent JOLTS report (for October) showed a slight uptick in layoffs as a percentage of all jobs, while layoffs remain well below pre-COVID levels. It will be important to see how November’s JOLTS report details the number of layoffs that happened during the month, as the economy is in a perceived “low-hire, low-fire” mode. The question regarding what is a cooling labor market and one that is cooling faster than expected remains up for debate and is a focal point for discussion on monetary policy at the Fed. That being said, it is important to understand the other dynamics in the labor market outside of the headline nonfarm payrolls figure in order to help walk the line between a cooling labor market and one that is freezing. Job growth is likely to remain sluggish for the economy, a notion that policymakers understand and fully expect, but the level which job growth should be maintained at to preserve a solid labor market is yet to be seen.

Regarding ISM’s Services PMI survey, attention should be focused on the prices index as a leading indicator of inflation trends. Previous surveys have shown intensified price pressures since April, with companies reporting that tariffs are having a direct impact on prices. ISM’s Manufacturing PMI survey reported a shrinking factory activity in the US for the tenth month in a row, while price pressures stabilized but remained elevated. Yields fell following the report, welcoming the “relief” in the prices index, while the poor figure spurred flight-to-safety buying. Recent data and PMI surveys have suggested that price pressures are declining, although November’s CPI inflation report did little to reassure that trend given the downward bias of the data collection efforts, leading to more importance on PMI data and the upcoming December CPI report.

Fed Funds futures are favorable to a rate cut from the Fed in April or June, followed by another reduction in September or October, while the Fed’s latest dot plot suggests that policymakers expect just one cut in 2026. The dot plot showed that policymakers are almost evenly split on how monetary policy should proceed in 2026, but President Trump’s Fed nominee is expected to support further easing in the economy. The president said he would be announcing his nominee for the Fed in January, so markets will continue to keep an ear open for the announcement.

The spread between the two- and 10-year yields is 70.60 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.465%.

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