From last week:

USA: Non-farm payrolls (Dec): Up 199k; U/e rate: Down 0.3pps to 3.9%.

EMU: HICP (Dec): Up 0.4% mom/5.0% yoy.

EMU: Retail sales (Nov): Up 1.0% mom/7.8% yoy, above mkt.

JPN: Tokyo CPI (Dec): Up 0.8% yoy, above mkt.

US equities were weaker Friday, S&P down 0.4%. US10yr yields lifted 4bps to 1.76%. While moves on Friday were relatively modest, folks returning from an extended holiday sojourn likely had to refresh their screens as from mid December, US10yr yields have lifted around 36bps. They are now at their highest since January 22, 2020.

Much of that rise has been over the past week and comes after the Fed's December memo - released last Wednesday - suggested a more hawkish Fed mindset than previously expected.

The December employment report should provide Fed policymakers added confidence that the labor market has satisfied their maximum employment objective. Though the headlines' gains (+199k vs. 249k) and private (+211k vs. 270k) payrolls were again well below consensus, the report's details were significantly more robust than the establishment survey headlines suggested.

US stocks traded poorly into the close as investors are getting antsy that US 10 year yields could start to shift above 2 % as the Fed starts QE tapering and balance sheet reduction. In other words, the gravy train is slowly coming to an end.

I think the US December non-farm payrolls number is pretty bad for US risk markets, and I realize I will face accusations of being a prophet of doom. There is a consistent pattern of disappointing NFP numbers that must be raising questions about the extent to which workers are coming back to the labor force. December year-on-year average hourly earnings (AHE) up 4.7% are well ahead of expectations and follow a decent upward revision to the previous month. And this is despite a much more considerable than expected increase in wages.

There are some gains in places for sure. However, it is difficult to see how this data set is anything but awful for equities. Strong wages, weak job creation and lackluster participation do not suggest a labor market coming back to health.

It's been a busy start to the year. Omicron has increasingly been seen in a benign interpretation, bringing forward the long-anticipated shift from pandemic to endemic, and supporting broad risk sentiment. However, more interest rate hikes around the central bank spectrum have accelerated rotations within equity indices and pushed yields higher. 

Still, last week's price action post the FOMC minutes has also suggested that FX investors still have not fully taken on board Fed hawkishness. The consensus remains a long dollar on the majors on the FX side, but investors are still hesitant to engage in the potentially misleading early-year price action on the back of mixed bond curve signals.

Specifically, inflation markets and Fed pricing remain at odds with a wider than usual dislocation between Fed pricing and US inflation markets. In the Fed's latest Summary of Economic Projections, the Core PCE median projections were 2.7%/2.3%/2.1% respectively for 2022, 2023, 2024. Should the economy materialize according to their forecasts, the Committee saw the Federal Funds rate rising to 2.1% by year-end 2024 (compared to the market's 1.62% for year-end 2024).

But the market-implied indicates Core PCE inflation is well above 2.7% over that time frame. Otherwise put, the market has a higher inflation forecast than the Fed but sees rates lower than the Fed. Hence the bullish dollar signal remains entirely muddled.

The Fed's Daly (San Fran, non-voter) says that well-anchored inflation expectations make her less worried about an inflationary spiral than some of her colleagues. However, she said she felt the Fed needed to adjust policy. Daly said she would prefer to see gradual rate hikes and balance sheet reduction earlier than in the last cycle. 

And as I argued last week, tier-one data or rate hikes surprises are needed to push the US dollar higher. 

A more rapid QE would be worse for long-end bonds (higher yields), EM and equities and potentially slow down the hiking cycle. A very slow unwind would keep long-end yields contained but require more interest rate hikes, triggering an enormous impact on the USD.

That's where I think we are in this early stage of the year. 

Indeed, mice and men's best-laid US dollar bullish plans often go awry.