Mixed Signals in the Markets: US Employment and PMI Reports Shake Things Up

The job report and Services PMI in the US gave the market a bit of a rollercoaster ride last Friday. The dollar flexed its muscles after the employment statistics revealed the US added 216K jobs in December, beating the expected 170K. However, the November job figure got a downgrade to 173K. Unemployment held steady at 3.7%, defying expectations of a slight increase to 3.8%. The real surprise came with wage growth which shoot up by 0.4% for the month, outpacing the expected 0.3%. As we know, wage growth is a leading indicator of inflation, making the future outlook and the possibility of a Fed rate cut in March less clear-cut. Over the year, average wages in the US grew by 4.1%, beating the expected 3.9%. But the dollar rally based on the report was short-lived. EURUSD briefly dipped to 1.0880, but within an hour it not only recovered but also trended upward. The US Services PMI report played a part in this turnaround. Service sector activity is a key leading indicator for economic expansion, responsible for about 70% of the US GDP and employing around 70% of the workforce. The overall Services PMI dropped from 52.7 to 50.6 points, but the hiring sub-index plummeted from 50.7 to 43.3. In other words, a significant number of respondents reported sharp hiring cuts in December compared to the previous month.The component of new orders in the report also declined in December compared to November but remained in the expansion zone, i.e., above 50 points. Analyzing the overall market reaction to Friday's stats, it seems the market put more weight on the PMI report. This isn't surprising, considering labor market indicators are lagging indicators – they reflect peaks and troughs later than business cycle indicators. On the contrary, survey indicators like PMI can preemptively signal a shift in a business cycle. The mixed US statistics were offset by Eurozone data. European inflation in December accelerated but was less than expected – 2.9% against a forecast of 3.0%. Signs of slowing inflation increased the likelihood of the ECB adopting a softer policy earlier than anticipated, weakening the upward momentum of the euro. As a result, EURUSD continues to stabilize in the 1.09-1.10 range it occupied before the release of fundamental data.An important event this week will be the release of the US inflation report on Thursday. The consensus forecast anticipates a slowdown in core inflation from 4 to 3.8% and an acceleration in overall inflation from 3.1% to 3.2%. Also, on this day, we'll get a batch of labor market data – initial claims for unemployment benefits. In recent weeks, their behavior has become ambiguous again; the weekly increase has started to decline and is nearing the minimum of the current business cycle:As seen, US statistics remain quite contradictory, possibly because the disparity is evident when comparing leading indicators (survey data) and lagging indicators (such as labor market data). Therefore, markets are not rushing to reassess the chances of a Fed policy easing, which remains the main driver for all asset classes.The dynamics of the dollar this week will likely hinge on the inflation report. Until Thursday, we can expect stabilization in current ranges. The EURUSD retest of the 1.10 level and the subsequent pullback vividly show that the market is not ready to determine the trend for the main currency pair just yet.