US services indicator unexpectedly climbed, Fed may keep tighten policy to manage high inflation

　　

The equities market kicked off the week with losses and bond yields climbed as a US services gauge unexpectedly rose, fueling speculation the Federal Reserve will keep its policy tight to tame stubborn inflation. In the meantime, treasuries slumped across the curve, driving 10-year yields to 3.6%. Swaps showed higher expectations on where the Fed terminal rate will be, with the market indicating a peak above 5% in the middle of 2023.

A majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse. About 28% of survey respondents expect defaults to jump significantly if US rates peak at or below 5%. Now, market participants are also anxiously awaiting Friday’s report on US producer prices – one of the final pieces of data Fed officials will see before their Dec.13-14 policy meeting. Inflation numbers over the past month have indicated pressures are slowly cooling, but remain very elevated.

The benchmark, the sell spread throughout all major S&P 500 sectors, with about 95% of the gauge’s companies in the red. The S&P 500 tumbled by 1.79% daily, as all eleven sectors stayed in the negative territory. Especially since the Consumer Discretion sector was performing the worst among all groups, falling 2.95% for the day. Meanwhile, the Nasdaq 100 fell by 1.7%, Dow Jones Industrial Average declined by 1.4%, and the MSCI World index dropped by 1.2% on Monday.

Main Pairs Movement

The US dollar bounced back on Monday after the release of the ISM Services PMI, rising to 56.5 in November from 54.4 in October, which is higher than the market expectation of 53.1, also with the robust Nonfarm Payrolls report, the US Dollar gathered strength against its rivals with the initial reaction and the US Dollar Index rised 0.71% on the day at 105.292 .

US Dollar dropped to over a five-month low at $104.113, the higher-than-expected index may lose the pressure of aggressive policy tightening by the US central bank and release the downward pressure on the greenback. Besides, China’s easing Covid restrictions slow the buying pressure, the EURUSD has dropped lower than 1.05084, and the EUR/USD path of least resistance is downward biased. Therefore, the EUR/USD first support would be the November 22 daily low of 1.022.

The gold price break fell below the cushion of $1,770.0 after surrendering the $1,780.0 support on Monday, the market mood goes soured after the release of the stronger-than-projected US ISM Services PMI data, which triggered a sell-off in the risk-perceived currencies, besides, the upbeat US Nonfarm Payrolls (NFP) data released last week cleared that labour demand is stellar led by strong demand from households. However, the market ignored the surprise rise in employment data and supported Gold prices further.

Economic Data

Currency	Data	Time (GMT + 8)	Forecast
AUD	RBA Interest Rate Decision (Dec)	11:30	3.1%
AUD	RBA Rate Statement	11:30	–
GBP	Construction PMI (Nov)	17:30	52
CAD	Ivey PMI (Nov)	23:00	51