Trading Day: Defense over tech, payrolls next

By Jamie McGeever

ORLANDO, Florida, Jan 8 (Reuters) – Global stocks mostly fell, while oil and Treasury yields rose on Thursday, as investors reacted nervously to U.S. President Donald Trump’s call for a huge increase in defense spending and awaited key U.S. employment figures on Friday.

More on that below. In my column today I look at why the December nonfarm payrolls report is unlikely to do much to bridge divisions among policymakers at the Fed, which, by some measures, are the deepest in decades. 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Trump says U.S. oversight of Venezuela could last years 2. Trump’s ‘Donroe Doctrine’ targets China, U.S. oil firmscould pay the price: Bousso 3. U.S. October trade deficit lowest since 2009 as importsdecline 4. Market risk mounts as Supreme Court weighs Trump’semergency tariff powers 5. Nvidia requires full upfront payment for H200 chips inChina, sources say

Today’s Key Market Moves

* STOCKS: Wall Street mixed – S&P 500 flat, Nasdaq falls;Dow up, Russell 2000 hits new high. Japan’s Nikkei -1.6%, HangSeng -1%, Europe a mixed bag. * SECTORS/SHARES: U.S. tech -1.5%, energy +3%, defensesector at new high. Lockheed Martin +4%, Glencore U.S. shares+9%, GM -2.5% in after hours trade. * FX: Dollar rallies across the board. USD index hits1-month high; ZAR, AUD, SEK among the biggest decliners -0.5%. * BONDS: U.S. yields up 4 bps at long end, bear steepeningthe curve. Japan yields mostly lower, but 40-year hits new high3.79%. * COMMODITIES/METALS: Oil rallies 4%, gold +1%, LME copper-1.5% from record high, nickel -4%.

Today’s Talking Points

* War footing

U.S. President Donald Trump said on Wednesday that the U.S. defense budget should increase 50% to $1.5 trillion next year, and advocated measures to block dividends and buybacks for U.S. defense firms until weapons production accelerates.

Add to this the intervention in Venezuela, Trump warning the U.S. could flex its muscle elsewhere in the region, Washington’s sights on Greenland, and how this will all be viewed in Beijing and Moscow; little wonder defense stocks are surging.

* China extends gold run

China added gold to its FX reserves for a 14th month in December. China’s gold stash is now just under $320 billion, nearly half its official holdings of U.S. Treasuries worth $668 billion, which is the lowest since 2008.

The direction of travel is clear, and China’s affinity for gold has been a driving force behind its rise to a record $4,550/oz. Gold is central banks’ second-largest asset holding, eclipsing the euro and now only behind the U.S. dollar. Global tensions this year might narrow that gap further.

* U.S. GDP head-scratcher

The U.S. trade deficit in October was much smaller than expected, the narrowest since 2009, and likely to boost Q4 GDP. Indeed, upward revisions started to flow on Thursday, most notably the Atlanta Fed’s GDPNow model – to 5.4% from 2.7%.

But the boost from net trade masks anomalies related to pharmaceutical imports and precious metals exports, and these one-off factors are unlikely to be repeated. TD Securities economists reckon any upward revisions of more than 1 percentage point would be “extreme”. So, good news, but not a game-changer.

Murky U.S. jobs data risk deepening historic Fed divisions

The clearest snapshot of the U.S. labor market will be released on Friday, but December’s employment report likely won’t provide enough clarity to bridge the deep divisions among Federal Reserve officials over the future path for interest rates.

By some measures, the divergence of opinion on the Fed’s rate-setting committee – long a consensus-driven body – is the widest in decades. Jobs data is currently the Fed’s guiding light, but the signals are pretty murky.

Sure, there is broad-based agreement that the labor market is weak. But weak enough to warrant further rate cuts on top of the 175 basis points already delivered, when inflation is near 3% and about to enter a sixth year above the Fed’s 2% target? 

Second-tier jobs figures on Wednesday didn’t offer much clarity. Private sector job growth rebounded less than expected in December, yet the ISM services sector employment index was the highest in nearly a year. Meanwhile, the Job Openings and Labor Turnover Survey, or JOLTS report showed that job openings in November were well below forecasts, but it also noted that layoffs fell sharply. 

Ultimately though, the JOLTS, ADP, ISM employment index and Thursday’s weekly jobless claims are all just the opening act for the main show on Friday, when the Bureau of Labor Statistics releases December’s non-farm payrolls job growth and unemployment rate. 

Economists expect modest job growth of 60,000 and a slight drop in the unemployment rate to 4.5% from 4.6%. 

Given the decidedly murky labor market picture, the Fed could be on hold for some time, absent further evidence of labor market weakness. Interest rate futures markets aren’t fully pricing in the next quarter percentage point cut until June. 

MIND THE GAP

Predicting how the Fed will move could become a lot more challenging this year, however, because the rate-setting Federal Open Market Committee is divided like rarely before.

Here’s a quick recap of what emerged from the Fed’s policy meeting last month when it lowered the Fed funds target range by 25 basis points to 3.50-3.75% and published its latest staff economic projections: 

*December marked the strongest hawkish pushback against a rate cut since 2019

*This was the first meeting with three dissents since 2019 

*The “dot plot” showed seven out of 19 officials expect rates to hold at or above current levels 

Indeed, dissenting votes by Fed Governors last year surged to their highest level since 1993, following three decades that saw just five dissents in total. Until December, the FOMC had not recorded three or more dissents at a single meeting since 2019, a level of disagreement seen just nine times since 1990.

This divergence appears to be widening. 

Directors at two-thirds of the Fed’s regional banks voted not to change the interest rate charged to commercial banks for emergency loans. This recommendation was ultimately overruled by the FOMC’s 9-3 vote to lower the policy rate, but it highlights just how contested that easing decision was. 

FED BANK PRESIDENTS VS GOVERNORS

For all the talk of a more dovish Fed this year under the guidance of a new chair appointed by President Donald Trump, the reality may be quite different.

Trump is expected to nominate current Chair Jerome Powell’s successor later this month. Powell, who steps down in May, is considered a natural policy “dove”. He is known for his consensus-building skills but also his fierce defense of the central bank’s independence. His successor will lean dovish too, but may find it more difficult to sway the committee. 

That’s in part because of the growing divide between Fed governors, who have been pushing for rate cuts, and regional Fed bank presidents, who have been less willing to look through sticky inflation.

And, importantly, the Fed’s Board of Governors last month unanimously reappointed 11 of the Fed’s 12 regional bank presidents to their positions, the exception being Atlanta Fed chief Raphael Bostic, who is retiring. 

Ultimately, the FOMC’s rate decisions this year should hinge on whether officials believe inflation is a bigger risk to the economy than unemployment. Powell successfully made the case for the latter last year, but the dissenting voices are getting louder, and the politics are getting more complicated.

Investors assuming rate cuts are in the bag may want to think again. 

What could move markets tomorrow?

* Japan household spending (November) * China producer, consumer inflation (December) * Taiwan trade (December) * Germany industrial production (November) * Germany trade (November) * Euro zone retail sales (November) * ECB board member Philip Lane speaks * Brazil inflation (December) * Canada employment (December) * U.S. employment (December) * U.S. University of Michigan inflation expectations,consumer sentiment (January, prelim) * U.S. Federal Reserve officials scheduled to speak includeMinneapolis Fed president Neel Kashkari and Richmond Fedpresident Thomas Barkin

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever; Editing by Nia Williams)