LONDON/NEW YORK, Jan 3 (Reuters) – The dollar headed for its largest one-day rise in over three months on Tuesday, while U.S. stocks bucked a global equities rally in a macro-packed week that could offer a steer on when, and at what level, U.S. interest rates might peak.
The MSCI All-World index (.MIWD00000PUS) dipped 0.15%, dragged by declines in U.S. stocks, while European shares jumped to two-week highs, led by hefty gains in anything from financials, to oil and gas stocks, to healthcare.
The Dow Jones Industrial Average (.DJI) lost 0.1% in early trade, the S&P 500 (.SPX) slid 0.3%, and the Nasdaq Composite (.IXIC) lost 0.6%.
The dollar index was last up 0.7% at 104.42.
The euro was the worst-performing currency against the dollar , falling by the most since late September, after German regional inflation data showed consumer price pressures eased sharply in December, thanks in large part to government measures to contain natural gas bills for households and businesses.
Data on U.S. payrolls this week is expected to show the labour market remains tight, while EU consumer prices could show some slowdown in inflation as energy prices ease.
“Energy base effects will bring about a sizeable reduction in inflation in the major economies in 2023, but stickiness in core components, much of this stemming from tight labour markets, will prevent an early dovish policy ‘pivot’ by central banks,” analysts at NatWest Markets wrote in a note.
They expect interest rates to top out at 5% in the United States, 2.25% in the EU and 4.5% in Britain and to stay there for the entire year. Markets, on the other hand, are pricing in rate cuts for late 2023, with fed fund futures implying a range of 4.25% to 4.5% by December.
“The thing that makes me nervous about this year is that we still do not know the full impact of the very significant monetary tightening that’s taken place across the advanced world,” Berenberg Senior Economist Kallum Pickering said.
“It takes a good year, or 18 months, for the full effect to kick in,” he said.
Central banks have expressed concern about rising wages, even as consumers have struggled to keep up with the soaring cost of living and companies are running out of room to protect their profitability by raising their own prices.
But, Pickering said, the labour market tends to lag the broader economy by some time, meaning that there is a risk that central banks could be raising interest rates by more than the economy can withstand.
“What central banks are inducing is essentially excess cyclicality, which is – they overstimulated in 2021 and triggered an inflationary boom and then overtightened in 2022 and triggered a disinflationary recession. It’s exactly the opposite of what you want central banks to do,” he said.
Investors will get their first insight into central bank thinking later this week when the Federal Reserve releases the…
Read More: Dollar posts big gains, U.S. stocks buck global rally