Risk rally tests dollar as China’s factory slump deepens; euro-zone disinflation steadies ECB while US core PCE holds
Traders weighed China’s eighth straight contraction in manufacturing against cooler euro-area inflation and steady US core PCE, keeping the dollar mixed as equities extended a powerful risk-on surge and rate-cut hopes stayed in play.
Key points
- China’s official manufacturing PMI printed 49.2, marking an eighth consecutive month of contraction, with property stress and price wars stifling factory margins and growth; fresh policy support remains in focus.
- Wall Street extended a powerful advance, with the Dow, S&P 500 and Nasdaq each jumping roughly 3–4% as holiday-season risk appetite broadened.
- Euro-zone inflation hovering near 2% reinforces expectations the ECB will keep rates steady; US core PCE held around 3%, sustaining the disinflation trend without re-accelerating.
- FX: High-beta currencies found support on improved risk sentiment, while the yuan softened after the weak PMI; the euro steadied as disinflation progressed without signaling acute recession risk.
- BlackRock’s spot Bitcoin ETF surpassed $70 billion in assets under management, highlighting institutional demand despite crypto’s underlying volatility.
- US retail dynamics remain bifurcated: Black Friday sales rose about 4.1% year over year, but inflation pressures and a “K-shaped” spending pattern persist.
- MIT’s “Iceberg Index” suggests AI could affect 11.7% of US jobs, a potential driver of sector rotation and valuation dispersion.
China’s contraction deepens, yuan on the defensive
China’s manufacturing PMI of 49.2 underlines persistent demand softness and margin compression as developers deleverage and manufacturers fight for share through discounting. The eighth straight sub-50 reading keeps pressure on Beijing to step up targeted support for the property sector and local financing. In FX, that mix typically weighs on the onshore and offshore yuan, with traders watching for stronger daily fixings and liquidity operations to stabilize sentiment.
US stocks rip higher as risk appetite broadens
US equities rallied 3–4% as momentum rotated into cyclicals and growth alike. Improved breadth, lighter holiday liquidity, and stable inflation data encouraged dip-buying. While some strategists are floating long-range S&P 500 targets as high as 7,000–8,000 into 2026, the near-term path hinges on earnings resilience and the pace of disinflation. For FX, a buoyant equity tape generally supports AUD/NZD and other risk-sensitive G10s, while reducing haven demand.
Euro-area disinflation steadies ECB expectations
With euro-zone inflation tracking near 2%, traders see the European Central Bank on hold as it gauges the durability of disinflation against tepid growth. The euro has found a floor as rate-cut timelines normalize and terms of trade stabilize. Softer price pressures without a sharp growth shock tends to compress FX volatility, though a renewed energy shock or growth miss could quickly reprice the curve.
US core PCE holds, keeping the “soft-landing” debate alive
Core PCE hovering around 3% extends the glide path lower without flashing a re-acceleration, a constructive backdrop for risk assets and range-bound Treasury volatility. A steadier inflation trend curbs US dollar upside, especially if foreign disinflation narratives become less aggressive and relative growth spreads narrow.
Crypto flows and the broader risk complex
BlackRock’s spot Bitcoin ETF topping $70 billion AUM underscores the institutional mainstreaming of crypto exposure. For cross-asset traders, persistent ETF inflows can bleed into broader risk appetite and sentiment proxies, though inherent crypto volatility keeps positioning tactical.
Consumers, costs, and AI disruption
US Black Friday sales rose about 4.1% year over year, yet the spending picture remains split: higher-income households continue to splurge while lower-income consumers pare back, consistent with a “K-shaped” demand profile. Separate estimates suggesting households need far more income than commonly assumed for “basic needs” speak to lingering cost-of-living headwinds. Meanwhile, MIT’s Iceberg Index—flagging AI exposure for 11.7% of US jobs—may influence sector multiples, favoring capital-light, automation-levered models while pressuring labor-intensive industries over time.
FX market snapshot: What matters next
– Dollar: Mixed as disinflation progresses and risk assets climb; path likely driven by incoming labor data and services inflation.
– Euro: Firmer tone on near-2% inflation and ECB-on-hold expectations; growth prints remain the swing factor.
– Yuan: Soft after the PMI miss; traders watch for stronger fixings, credit impulses, and property measures.
– High beta G10: AUD/NZD supported by risk-on mood; durability depends on China’s policy cadence and global growth indicators.
What to watch
- China’s credit and property support measures; any signs of inventory clearing in manufacturing.
- Euro-area core inflation revisions and ECB commentary on the pace of balance-sheet runoff.
- US labor-market data, services inflation, and corporate margins as the next driver of USD and equities.
- Crypto ETF flows and implied volatility across risk proxies.
FAQ
How does China’s weak PMI affect FX markets?
A sub-50 PMI typically weakens the yuan as growth expectations fade, and it can pressure Asia FX broadly. If risk appetite holds up globally, high-beta G10 currencies may still find support, but prolonged Chinese weakness usually caps their upside.
Why is the euro steadier even as inflation falls?
Disinflation toward 2% without a sharp growth downturn reduces the need for aggressive rate cuts, supporting rate differentials and the euro. Markets also see less tail risk in energy, which helps the currency’s terms of trade.
What does steady US core PCE mean for the dollar?
Core PCE holding around 3% supports the soft-landing narrative. That typically limits dollar upside unless US growth meaningfully outperforms peers or inflation re-accelerates.
Do strong US equities always weaken the dollar?
Not always. Equities up alongside stable rates can weaken the dollar if global risk appetite broadens. But if US growth vastly outpaces other regions, the dollar can strengthen even during equity rallies.
Why are Bitcoin ETF inflows relevant to macro traders?
Persistent inflows signal broader risk appetite and institutional engagement. They can tighten financial conditions via wealth effects and influence volatility across correlated risk assets.
How could AI-driven job exposure impact markets?
If 11.7% of US jobs face disruption, sectors with higher automation leverage may command premium multiples. Conversely, labor-intensive industries could face margin pressure, affecting equity and credit spreads.
This report was prepared by BPayNews for informational purposes and does not constitute investment advice.
