A quite stunning rally in equities yesterday with the S&P up 1.8%. As I said a few days ago, a bounce was expected, but the more interesting question was… are we going to re-test the highs or will it just be a corrective bounce before a deeper decline. To be honest, at this point in the evolution of the bounce, I expected that I would have a better insight into which of those outcomes was more probable, but given the nature of the rally, and the preceding decline, I am unclear about the technicals at this point. I can tell you that I believe we should tick up a few more points as the short term bounce looks mature, but after an intra-day correction, it’s entirely possible that we see new year-to-date highs, but I really can’t say more than that, although I do think the risk is we re-test the highs. What is clear for all to see however is that US bond yields appear to be positively correlated to equity prices at the moment – the rally in equities was matched by rises in bond yields (declining bond prices).

Today we await the non-farm payrolls employment report in the United States, this along with Eurozone inflation numbers from earlier this week will be the critical data likely to impact the macro-scope. While Eurozone inflation is a key determinant for the ECB’s decision making process, employment data in the U.S, and more specifically wage growth is the key determinant for the Federal Reserve’s decision making. Economists have forecast 240,000 additions to the labour force, any positive surprise could put pressure on the front end of the US interest rate curve, and of course give the US dollar a boost, but I’ll pay close attention to the average hourly earnings data as well. We really are getting to the stage where we have to monitor upside surprises in that number. It’s the one thing that might cause a hawkish reaction from the Federal Reserve board members.

This morning we’ve seen further signs of the sluggish growth picture in the UK, with a slightly better than expected industrial production number albeit not as good as forecast. In fact industrial production numbers coming out in select members of the European Economic area – Sweden, Spain, France, Germany etc – are no great shakes. I wouldn’t say disastrous, but… stagnating is probably the appropriate description. Let’s be honest, it’s not really surprising! We’ve also seen inflation data in China published overnight, and that, as expected showed a slight uptick to 1.5% year on year to December, from 1.4% previously, certainly not a significant enough increase to deter Chinese central bank from easing policy should the need arise. The only other data of global import that I feel I should mention is the Leading Index data in Japan which was somewhat disappointing. I think that when Mr Draghi wakes up sweating at night, from dreaming about what could go wrong in the Eurozone, it’s images of the Land of the Rising Sun that are responsible for his terrors. There but for the… well you know!

So far this year, the US dollar really hasn’t done much, if anything it’s weakened against currencies like the Japanese yen, Mexican peso and the Indian rupee. The excitement in currencies have been focussed around the European continent, with new 2 year lows for EUR/USD posted every day in 2015 so far. The US employment data might change that picture later on today, but I would find it even more interesting if we get strong employment data and we still don’t get a dollar rally. If that happens it could well be a sign that too many dollars are owned, and it could be a warning that what had begun to look like a one way trade might need to pause for a while. It’s just something to look out for.

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