This week will prepare markets for the last key events of the year: policy meetings by the Fed, ECB and BoE on 14-15 December. It looks like the dollar's long positioning has now completely faded, and three factors - the Fed remaining hawkish, China's optimism being misplaced and energy prices rising again - could contribute to a USD re-appreciation. USD: Balanced positioning The dollar index is now trading 8% off its early November high, and it can’t be excluded that a busy couple of weeks before the festive period will continue to put some pressure on the greenback, which is incidentally seasonally weak in December. This is, however, not our base case, as we suspect instead that the dollar correction may have run its course, and several factors should allow for some re-appreciation into year-end. First, markets have speculated about a dovish pivot from the Federal Reserve after signs of slowing inflation, but our suspicion is that the Fed will maintain its hawkish narrative for longer, implicitly or explicitly protesting against the recent drop in yields. Strong jobs numbers on Friday should offer a basis for this. After all, endorsing the market’s dovish narrative may be premature and risky for the Fed whose plan should be to let markets do the heavy lifting in tightening - and our rates team is bearish on Treasuries in the near term. A still highly inflationary global environment may struggle to live with sub-3.50% 10-year yields. Secondly, USD/CNY is trading below 7.00 for the first time since September, with the yuan following Chinese risk assets higher after the government announced an easing of Covid rules. The government’s move appears to be a direct consequence of recent demonstrations against its Covid policy, but a further untightening of restrictions may prove complicated. Many parts of the country – including Beijing – are facing a surge in cases, and the vaccination rates (especially booster doses) among the elderly still look insufficient. At the same time, the real estate and export sectors remain a key concern for the medium outlook in China, and one that may prevent the yuan from appreciating much further. Third, with Russia rejecting the cap on oil prices at $60/bbl and threatening output cuts, along with a projected drop in temperatures in many parts of Europe, the energy crisis may return and we see ample room for gas and oil prices to climb back. That would be a positive development for the dollar. Today, the US calendar includes ISM service figures for November, while PPI and University of Michigan survey numbers are the other major releases to watch this week. There are no Fed speakers as the pre-FOMC blackout period has now started. According to our calculations based on CFTC data, the dollar’s aggregate positioning against G10 currencies is now neutral, and at the lowest levels since August 2021. With more limited room for position-squaring effects to weigh on the dollar, our view for this week is that we could see at least some stabilisation in the greenback. DXY may struggle to extend its drop below 103/103.50, and a rebound to 105.50/106.00 looks more likely in our view. EUR: Energy scares coming back? The eurozone’s calendar lacks market-moving data this week, and only includes some final releases (GDP, PMIs). However, we’ll get a chance to hear the last few comments by European Central Bank officials before the 15 December policy meeting. Markets appear to have reinforced their 50bp expectations over 75bp, especially after the latest deceleration in eurozone inflation which makes the hawkish rhetoric harder to defend. However, energy-related news should be more relevant for the euro this week, with falling temperatures in Europe and the price cap on Russian oil coming into effect today. Urals grade crude is trading around $10 below the $60/bbl cap, but Russia has already announced that it would prefer to trim production rather than sell at the embargo price. OPEC+ has held production steady and is only scheduled to meet again in February, but we continue to see risks that a tighter picture in the energy market in 2023 could lead to higher oil and gas sooner rather than later. Given the high sensitivity of EUR/USD to the eurozone’s terms of trade (which is primarily driven by energy prices), further upside risks for energy commodities equal downside risks for the euro. This week, some dollar stabilisation could make the EUR/USD rally run out of steam around the 1.0600/1.0650 area, and possibly lead to a more sustainable drop below 1.0450/1.0500. We remain bearish on the pair into year-end. GBP: Cable is still a dollar story Markets have aligned their expectations for the Fed, the ECB and Bank of England’s December rate hikes at 50bp. There is only a residual 7bp of extra tightening in the OIS curve for the 15 December BoE meeting, and our call is also for a half-point move. Rate expectations are unlikely to be stirred...

Key highlights EUR/USD is showing positive signs above the 1.0500 resistance. It broke a few hurdles near 1.0380 and 1.0480 on the 4-hours chart. EUR/USD technical analysis Looking at the 4-hours chart, the pair settled above the 1.0450 zone, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours). The bulls even pushed the pair above the 1.0500 resistance and the last swing high at 1.0497. The pair is now showing positive signs above the 1.0500 level. On the upside, the pair is facing resistance near the 1.0580. The next major resistance may perhaps be near 1.0620. A clear move above the 1.0620 and then 1.0650 might start another decent increase. In the stated case, EUR/USD may perhaps test 1.0700. Any more gains could set the pace for a move towards the 1.0800 resistance zone. An initial support is near the 1.0480 level. The next major support is near the 1.0440 zone. Any more losses might send the pair towards the 1.0350 support zone.

US stocks wrapped their second straight week of gains, even if stocks slipped on Friday on the back of better-than-expected US Payrolls data. The good news is bad news/ bad news is good news when it comes to economic data is back in fashion again, and we expect this to continue. What is fascinating about recent price action is that according to Deutsche Bank, out of 38 asset classes, 35 of them posted gains in November. This is an unusual move, and it could mark a key turning point for markets after a torrid 2022 for stocks and other risky asset classes. The fact that US payrolls data was stronger than expected, but the S&P 500 only fell 0.1% on Friday, is also a sign that the market has made up its mind that the Fed will be more dovish in 2023, and that this recovery rally could have legs.  A deep dive into the US labour market  US non-farm payrolls were stronger than expected for November, with payrolls rising 263,000 in the month. The unemployment rate remained steady at 3.7%, and the Bureau of Labor Statistics said that there were notable gains in employment in the leisure and hospitality sectors, healthcare, and government. There were job losses in retail trade and in transportation. However, there are some troubling details in this labour market report, one that is all too familiar to us in the UK. The number of long-term unemployed people in the US is 1.2 million, which is approx. 20.6% of all unemployed people, according to the BLS. Added to this, the number of people not in the labour force who want a job is 5.6 million, however, these people are not considered unemployed because they are not looking for work. The number of people marginally attached to the labour force is 1.5 million. Thus, the number of people of working age in the US who cannot work, or who are not looking for work, is putting upward pressure on wages. US wage growth was 0.6% last month, which is way above the level that is associated with inflation at 2% - the Fed’s target rate. The long-term outlook is for wages to remain high. Although the JOLTS job opening survey shows that jobs openings have fallen in recent months, there are still 10.33 million job vacancies across the US, with 1.7 job openings per available worker. This is down from 2 openings per available worker, but it remains uncomfortably high. This is a key sign that sticky inflation, or core CPI could remain elevated for a long time.  When the labour market pivots  Of course, there is the other argument, the household survey of employment in the US is weaker than the establishment NFP survey. This is partly because the household survey counts one person with 3 jobs as having 1 job, while the establishment survey counts this as 3 separate jobs. If people are working more jobs to get by, this doesn’t suggest a healthy economy or labour market. Added to this, jobs losses were noted in retail and construction last month, two important cyclical sectors for the US economy. If they are showing signs of weakness, then this is a key sign that an economic slowdown is on the cards and that the labour market could soften in the weeks ahead. The question now is, when the labour market does finally soften, will bad news be good news for risky assets, or will bad news be nad news for risky assets?  The dollar collapse, will it continue?  We have been amazed by the resilience in risky assets of late. This year has seen some incredible macro themes, but it appears that some of these are starting to turn. The “Fed pivot” was given a boost last Wednesday, when Powell said that a 50bp rate hike was on the cards for next week. The market reaction was keenly felt in stock markets; however, it is also having a major impact on the FX market. The dollar index is down nearly 10% since its peak at the end of September, the DXY is now back at levels last reached in June. USD/JPY had one of its worst months in decades. This is a major reversal of the key dollar uptrend for 2022. As we move towards 2023, a weak dollar is good news for EM, EM bonds, sovereign bonds generally and for risk more broadly, especially US blue chips with overseas exposure. As we start a new week, we may continue to see a weaker dollar, however, after such a sharp decline in the buck in just two months, we will be watching to see if the weakness in the dollar persists, or if it has run out of steam.  Opec tries to stoke upward pressure on...

Europe European markets slipped back from their highs of the week, in the wake of an unexpectedly strong US labour market report for November, which saw 263k jobs added in November, and wages jumped sharply to 5.1%, although the pullback has been fairly modest in nature. The numbers have also done little to undermine what has been a strong week for the FTSE100, which has been helped by hopes of a relaxation of Covid restrictions in China, while the DAX has broadly traded sideways from last weeks close. The resilience of the US jobs numbers while welcome, has acted as a brake on market gains as investors price out the prospect of an imminent sharp slowdown in US rate hiking intentions, given it does little to alter the prospect of a 50bps rate move later this month from the Federal Reserve. It does however, make it less likely that we’ll see a rapid slowdown in the pace of rate hikes next year, a hare that was set racing by Fed chair Powell’s comments to the Brookings Institute earlier this week. Having seen such a strong jobs and wages report today, the focus will now shift to next week’s PPI report, as well as the November CPI report the week after, as to whether we see 50bps in January, which appears to have become more likely as opposed to 25bps, which had started to get priced in the lead up to today’s jobs numbers. Today’s best performers on the FTSE100 has been Primark owner Associated British Foods after being upgraded by Goldman Sachs, along with H&M, although Morgan Stanley was more cautious, on H&M. Goldman Sachs cited a weaker US dollar as being a benefit to ABF and H&M, with Morgan Stanley citing a challenging retail environment on the rest of the sector due to rising costs and weaker disposable incomes. US US markets opened sharply lower after wages growth rebounded strongly in November, to 5.1%, while payrolls growth only fell back modestly from October’s revised 284k, with 263k new jobs added. The Nasdaq 100 has seen the biggest fallers as higher yields clobber the big tech sector, and the higher valued part of the market, while the S&P500 has also slipped away from its technical resistance  DoorDash shares have fallen sharply sliding to 3-week lows after being downgraded over execution concerns by RBC. Earlier this week the shares gain after the company announced it was cutting 1,250 jobs, as well as incurring an $85m restructuring charge.   FX The US dollar rallied sharply after the November jobs report saw 263k jobs added while the October number was revised up to 284k. Average hourly earnings also rebounded strongly, jumping to 5.1%, while October was revised up to 4.9% from 4.7%. If the Federal Reserve weren’t concerned about wage growth before today’s report, their anxiety levels may have gone up a notch with this report. It also makes the prospect of another 50bps rate hike in January, much more probable, on top of the 50bps we are expecting to see in just under a fortnight’s time. What was slightly more concerning was a 2bps drop in the participation rate to 62.1% from 62.3%. Despite today’s rebound in the greenback, the pound and the euro still look set to hold onto the bulk of their weekly gains, while against the Japanese yen it is just about holding on the 200 day SMA, with the Bank of Japan no doubt enormously pleased that the yen is the best performer this week against the US dollar.    Commodities The rebound in crude oil prices this week has had two factors driving it. Firstly, there is some optimism that even though China is battling rising covid rates, authorities will be much more flexible in how they implement restrictions and lockdowns. There is also concern that OPEC+ might announce further cuts to production at their latest monthly virtual meeting over the weekend. A week ago, an output cut might have been more likely given where prices were then. Now with prices quite a bit higher and concerns about growth growing by the day it would be a reckless act indeed if OPEC+ were to do something to exacerbate a growth shock by deliberately pushing prices even higher. Gold prices have slipped sharply away from the $1,800 an ounce level as US yields rebounded strongly in the wake of today’s strong jobs report, and the US dollar rallied off its lows of the day.

The French economy is approaching a new period of marked slowdown in growth, a situation that is likely to weigh on the trajectory of public finances. Thus, while the government has incorporated an assumption of 1% real growth and 4.6% nominal growth in GDP, our forecasts for 2023 indicate figures of 0 and 3.6% respectively. This difference could result in a deterioration in public finances in relation to what was incorporated into the draft budget bill for 2023. Chart 1 highlights a close relationship between two differentials: the gap between the assumption for nominal growth incorporated into the draft budget bill and the actual growth achieved, and the difference between the deficit targeted in the draft budget bill and the actual deficit resulting from budget implementation (the revised draft budget bill is used for 2022). These elements suggest that a gap of 1 pp on growth would widen the public deficit by almost 10 billion euros, which in relation to GDP would result in a deficit of 5.4% of GDP at the end of budget implementation instead of 5% in the initial draft budget bill. Download The Full Eco Flash

In today's live stream, Michael is cautious as he believes the market can make new lows next year towards SPX 3100.