US Jobs Surge Drives Dollar to 110

The recent release of the U.Snon-farm payroll data has taken the financial markets by surpriseThe boost in job creation has exceeded expectations significantly, while the unemployment rate, which had been slowly climbing, has seen a declineThis shift propelled the U.Sdollar index to rise sharply, registering around 110, while market anticipations for interest rate cuts by the Federal Reserve in 2025 have now dwindled to merely one potential reductionThese developments have culminated in a tumultuous period for equity markets, exemplified by a notable drop in U.Sstock prices.

The repercussions of these events were felt particularly acutely on January 10th, when U.Sstocks plummeted more than 1.5%. Simultaneously, the yield on 10-year U.STreasury bonds surged, reaching an alarming 4.762%. The fallout also extended to non-dollar currencies, with the British pound, Japanese yen, euro, and Canadian dollar all weakening against the dollar

By the close of trade, the offshore Chinese yuan fell to a side of 7.3576 against the dollar.

Experts who spoke with financial news outlet Yicai suggested that the first quarter is likely to experience considerable volatilityWith a strong dollar that shows no immediate signs of reversal combined with limited expectations for additional Chinese economic stimulus, Asian equities are expected to endure similar fluctuationsHowever, the People's Bank of China has initiated measures such as issuing offshore central bank bills to stabilize the exchange rate and paused its purchases of government bonds to ease long-term yield pressures.

When examining the specifics of the U.Sjob market, December's non-farm employment numbers disclosed an increase of 256,000 jobs, greatly surpassing expectationsSimultaneously, the unemployment rate dipped by 0.1 percentage points to 4.1%. These figures prompted Wall Street analysts to deem the employment data as very robust, despite a downward revision of the previous two months' figures by 8,000 jobs

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Employment growth in the retail trade sector has rebounded significantly, presumably influenced by seasonal effects of a late ThanksgivingThe healthcare sector, leisure and hospitality, and government divisions have also reported substantial job growth.

Moreover, the decrease in the unemployment rate coincided with a modest rise in wages, with average hourly earnings seeing a 0.28% increase month-on-month, in line with forecastsSpecifically, wages in production and non-supervisory roles rose by 0.2% month-on-month and witnessed a year-on-year growth of 3.8%. Various sectors exhibited differing wage growth rates, with private education and health services, non-durable goods manufacturing, and professional and business services leading the charge, each growing by 0.5%. In stark contrast, industries such as mining, retail, and transportation showed declines in wages.

In light of this robust economic data, expectations for interest rate cuts have been further dented

The University of Michigan's consumer sentiment index fell at the beginning of January, falling below expectations, while inflation forecasts for one and five to ten years moved upwardsGoldman Sachs indicated that their revised outlook suggested the Federal Reserve might reduce rates by 25 basis points in both June and December of 2025, followed by another cut in June 2026. They suggested that the terminal rate would be maintained in a range of 3.5% to 3.75%.

Interestingly, some analysts contend that actual interest rate cuts in 2025 may be much harder to come byMatt Weller, Global Research Director at Gain Capital, expressed that if we continue to witness such strong data, the Federal Reserve would have little motivation to cut rates furtherHe anticipates just a singular rate cut in 2025, potentially only to display the Fed’s commitment and perhaps no rate cuts at all, a scenario that would likely provide continued support for the dollar.

As of the last week's close, the dollar index stood at 109.49, with Weller pointing out that the current dollar index was testing the 109.70 levels, facing resistance at approximately 110.50, and subsequent key levels stretching from 111.53 to 112.12. If these are crossed, he suggests significant market reactions could follow.

On the equity front, there is increasing scrutiny on the high valuations of Wall Street

In 2024, both the S&P 500 and NASDAQ indices recorded an impressive rebound of over 20%, with forward price-to-earnings ratios soaring to 21, placing them at historical highsThis scenario raises concerns regarding the sustainability of stock prices, with analysts warning that a significant pullback in U.Sstocks could reverberate through Asian markets.

A pressing question appears to be whether the rising yield on U.Sbonds could negatively impact overvalued stocks, particularly growth stocksWeller has articulated a cautious outlook for the S&P 500 tied to its high valuations amid a hawkish stance from the U.SFederal Reserve on interest ratesHistorically, stock markets commonly face risks when equity yields lag behind bond yields; this trend was notably pronounced in the early 2000s.

Despite these warning signs, there is an unexpected optimism on Wall Street regarding U.S

stocks, with consensus forecasts projecting the S&P 500 to reach 6,600 points this year, with some even speculating it could hit 7,000 pointsGoldman’s head of hedge fund research, Tony Pasquariello, remarked on the historical positioning of U.Sstocks at these high valuationsNonetheless, his analysis indicates that, based on the current macroeconomic environment and corporate fundamentals, the market is trading at fair value rather than being strictly overvalued.

Additionally, he has elucidated that historical research shows that elevated absolute valuations tend to accompany higher risks of market pullbacksGoldman Sachs anticipates constrained expansion potential for U.Sstock valuations moving forward, with stock price increases increasingly reliant on earnings growth, which analysts forecasted to rise by approximately 12% throughout 2025.

The strong non-farm data has triggered increased volatility in the U.S

market, as illustrated by a 1.54% drop in the S&P 500 last Friday, which closed at 5,827 pointsSome traders expressed concerns over the potential for further technical sell-offs if the index breaches the significant support level of 5,880 pointsImmediate downward targets could potentially dip below the December 2024 low of around 5,800 points, or the next critical support at 5,772. Such scenarios could see the index approaching long-term trend lines or the 200-day moving average, both hovering around the 5,670 point markHowever, many remain optimistic and advocate buying during dips.

Turning to the Asian markets, experts are predicting a phase of volatility in the first quarter, attributable to the fluctuations in the U.Smarkets, coupled with a strong dollar impacting emerging markets and uncertainties surrounding tariffs due to the incoming government

In the preceding week, the MSCI Asia Pacific index (excluding Japan) contracted by 1.4%, mainly dragged down by declines in Chinese A-shares, Hong Kong stocks, and Indian markets, which fell by 3% to 4%. In contrast, the South Korean market rebounded by 3% following prior heavy drops, while the Australian and Singapore markets led gains with 1% increasesThe tech hardware, semiconductor, and healthcare sectors performed better than media, entertainment, and utilities.

Korea attracted around $700 million in foreign inflows, whereas the Indian markets faced an outflow of $900 millionWith mounting external pressures, analysts believe that Hong Kong stocks may face more significant disturbances compared to A-sharesRecent volatility in Hong Kong has escalated, exemplified by substantial declines for major companies like Tencent Holdings and Contemporary Amperex Technology, whose stock values fell by 7% and 3%, respectively, following adverse external news

There are indications that market participants may still cling to risk-averse sentiments in the short term.

Nevertheless, several institutions assert that, under government policy stimulation, the Chinese economy is poised to escape its current lows, gradually stabilizing and facilitating a recovery in corporate profitsHuang Senwei, a senior market strategist at Legg Mason, informed reporters that the consensus anticipates A-share listed firms to witness a profit growth of 13.6% in 2025, placing it as the second-highest among global markets, behind the United States.

Furthermore, the affordable valuations in the A-share market are also a driving factorPresently, A-share price-to-earnings ratios sit at roughly 12 times, in stark contrast to India's burgeoning emerging market P/E ratios, which are nearly double that of ChinaThe current valuation for A-shares is still considered reasonable on a global scale.

In addition, institutions are keenly monitoring the recovery momentum in domestic consumption

In 2024, the "trade-in" policy has spurred the consumption of household appliances and automobilesHuang believes that China’s share of consumption in GDP is lower than that of most developed nations and emerging markets, indicating substantial room for stimulusContinual government policies aimed at enhancing consumption could provide a bolster to economic growth and instill confidence among investors in the stock market.

UBS even posits that tariff impacts may compel the Chinese government to intensify support for domestic consumption between 2025 and 2026 to stimulate internal demandDuring a routine press conference held on January 8, the government office indicated that the "two new" policies (massive equipment updates, and a trade-in strategy for consumer goods) would be reinforced, including introducing subsidies for digital products like mobile phones and smart watches

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