Equities drift lower, while hawkish BoJ spark JPY resurgence

• European stocks lower following recent record high for the DAX
• JPY soars as BoJ prepare to hike in 2024
• US employment data continues to dominate ahead of tomorrow’s jobs report

European markets are on the back foot in early trade today, with traders appearing to finally question whether the recent rally and rate expectations have become overextended. November saw widespread optimism that the ‘higher-for-longer’ rhetoric from central banks would instead shift to ‘lower-and-sooner’, with the FOMC now expected to push a rapid 125-basis points worth of cuts next year. This week’s focus on the US jobs market does provide the potential for additional pressure on the Fed should we see a notable deterioration in the economic outlook. Yesterday’s private ADP payrolls reading of 103k undershot expectations, highlighting the potential for a similarly underwhelming headline figure on Friday. Nonetheless, the recent ‘bad news is good news’ mantra adopted by markets has yet to kick in, with the record highs for the DAX highlighting how overextended things have become despite the less impressive economic reality.

The Japanese yen has been soaring off the back of a surprisingly hawkish Bank of Japan, which pushed market expectations for a 2024 rate hike campaign sharply higher. Coming at a time when the West plan to drive rates lower, the BoJ are instead expected to embark on a potential three 10-basis point hikes over the next 12-months. With members noting their confidence over price and wage strength, the Deputy Governor Himino stated that the BoJ “will carefully assess the situation and consider the timing and procedure of how to exit” negative rates.

Looking ahead, US unemployment claims data comes into view as we gear up for Friday’s jobs report. With both initial and continuing jobless claims on the rise of late, there are tentative signs that the US economy is finally starting to feel the squeeze. Nonetheless, we are yet to see any significant uptick in unemployment, with the Fed likely to remain confident that they have managed to land the perfect soft landing despite a historic monetary tightening policy seen over the past two-years. Energy markets remain key for inflation expectations, with recent natural gas and crude oil weakness helping to bring forward the anticipated beginning of the monetary easing process from the Federal Reserve.