At the end of the week there was cautious optimism in the markets – the indices on Wall Street closed with decent gains and the world dollar index recorded a sharp drop of almost 2%. In the background, the disappointment of the markets from Fed Chairman Jerome Powell’s words two days earlier and an employment report that points to a strong economy that supports more interest rate hikes.
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So what happened to jump the markets? There are several explanations, but it is difficult to find a clear and unequivocal answer, certainly not one that heralds a trend.
Let’s start with the employment data of the American labor market published on Friday. On the face of it, it appears to be a strong report, but it also includes several indicators of a slight cooling. On the one hand, the addition of jobs was significantly higher than expected – in October 261 thousand jobs were added when expectations stood at 195 thousand. On the other hand, the unemployment rate rose from 3.5% to 3.7% and the growth rate of the average salary also decreased slightly.
After the publication of the report, the contracts on Wall Street will price an average interest rate of 5.25% in June 2023, a significant increase compared to the situation today where the interest rate is 3.75%-4%. Data of this type in the recent past pushed Wall Street to sharp declines and the dollar upward. This time the trading day ended with sharp increases in the indices and the sharpest daily decrease (1.9%) of the dollar index since 2020. However, even after the current decrease, since the beginning of the year the American currency has climbed more than 15%.
Another possible explanation for the change of direction in the markets lies in what happened in the East. Speculation that China intends to abandon its strict “zero corona” policy, which includes lockdowns and severe movement restrictions, spread and led to a rally in the Hong Kong stock market as Chinese stocks led the gains. At the same time, the US dollar weakened against the Chinese yuan and oil prices jumped by 5% and copper by more than 7%. Later in the day, Chinese technology stocks also jumped in New York, including Alibaba, JD.com and Baidu. Other reports talked about the easing of policies for inbound flights to China, which benefited airline stocks.
But it was only speculation. “We have no intention of doing that,” China’s Ministry of Health clarified later. Unlike most of the world, China continues to adhere to the “zero corona” policy and pays a heavy economic price for it. Growth in the country amounted to 3% in a year – well below forecasts – and many economists expect future forecasts to be cut as restrictions continue.
Now it remains to wait and see how the markets will react at the opening of trade to the fact that China does not change direction. Another drama may occur on Thursday, when inflation data for the month of October will be published in the US. The forecasts are that the consumer price index increased by 0.7% so that the annual inflation rate will moderate to 8% after measuring 8.2% in September. The core index, which does not include the prices of Energy and food is expected to register an increase of 0.5% so that the annual rate will decrease to 6.5%, compared to 6.6% in September.
“The shekel will remain strong – but less than the peak”
Kobi Levy, head of the strategy desk at Bank Leumi, estimates that the dollar will maintain its strength in the coming period, as long as the markets suffer from many factors of uncertainty. “The US central bank’s interest rate decision and the strong employment data show an economy that can accommodate further interest rate increases in order to moderate inflation. Powell said very clearly that the pivot, a change in policy direction and lowering interest rates, is not on the table,” he says.
He adds that Powell’s message was that the interest rate will continue to rise, albeit at a slower pace, but until inflation returns to the target no relaxation of policy is expected. “This is a significant change compared to what the markets were expecting in recent months. They were expecting a pivot next year,” Levy says. In relation to the dollar, Blaumi estimates that it will maintain its strength: “The dollar is a currency in which interest rates are rising, with a strong and stable economy behind it. It is a refuge for investors all over the world. We see economies like Great Britain or Europe, where the consequences of the moves of the central banks on the economy are much more difficult”.
And what about the shekel? Levy explains that it is still considered a strong currency, but “the reasons for it to continue to strengthen from here are limited for all kinds of reasons”. He mentions, among other things, the fact that the Bank of Israel is beginning to hint at a moderation in the rate of interest rate increases. Estimates are that if inflation allows then the interest rate here will stop at around 3.5%, but this forecast may certainly change upwards. According to the economics department at Leumi, the interest rate in Israel will reach a level of 3.5-4% and the average dollar-shekel exchange rate will be in the range of 3.45-3.65 in the coming year.