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The Market Pulse: US Trading Day 11 @jan 17, 2024

INSIDE

Key Points

Trading Session Summary

?What Are We Doing

Key Points

  • Good data is good, but too good is bad…. Will it be March? Will it be May? Will it be at all?

  • Uncertainty brings volatility… be ready for it.

Trading Session Summary

 

Fed-Pivot Repricing

I always welcome good economic data, but in financial markets sometimes good data is bad. Solid economic data, from consumers to industrial production and housing, suggests economic resilience, inflationary pressures, and higher rates for longer. With bond traders pushing rate cuts forward, future cash flows must be repriced. With it, stocks and bonds retreated as yields climbed across the curve (the price and yield of bonds move in opposite direction).

 

On the side of hard economic data, December US Retail Sales exceeded expectations and Industrial Production and Capacity Utilization improved. Soft data from surveys like the Beige Book and Homebuilder Sentiment also improved, with the latter helped by lower mortgage rates that increased customer traffic, sales and bolstered the demand outlook for housing.

 

While a slowdown is still very much possible, there is little today to suggest that it will be sharp. If anything, with consumer confidence strong and the economic landscape looking good, barring a sudden deterioration in the labor market and prior revision of prior reported economic data , the risk is that rates will in fact remain higher for longer. At least in Davos it has been the “talk in town”….

 

To be fair, bond traders are still pricing 5 to 6 rates cuts in 2024 (~140 basis points), down from ~170 bps as recently as January 12th.

 

Rough waters ahead….

A wide dispersion of views, that are fluid and based on new incoming data, will lead to a myriad of discussion and scenarios for the months ahead – will the Fed cut in March? Will it be cut in May? Will it be in the 1H at all?

 

Besides those questions, there are many others that come right after: will we have a soft landing or not? If so, what type of landing? If not, then what will happen? What stage of the economic and financial cycles are we in it? What will be the next macro regime? And on and on….

 

History and experience tell me that the consequence of too much uncertainty is usually bouts of quick and dramatic market moves that must price in shifting consensus views. As such, there has never been a better time than now to challenge the consensus and sometimes its arrogance.

Earnings on Top of the Radar

Q4 corporate earnings will provide a very good indication for the future ahead. On one hand, strong and robust results will be welcomed but with it, inflationary pressures, and other consequences. On the other hand, softer than expected earnings will bring forward conversation about monetary policy easing, but at the cost of deteriorating corporate fundamentals, that we also called #InvestmentAxioms.

 

Key events ahead (source Bloomberg):

US housing starts, initial jobless claims, Thursday

Republican presidential primary debate in New Hampshire, Thursday

ECB President Christine Lagarde participates in Davos panel discussion, Thursday

ECB minutes of December policy meeting, Thursday

Japan National CPI, Friday

US existing home sales, University of Michigan consumer sentiment, Friday

Let’s look where major financial market indices finished the trading day:

In Equities and Commodities:

Global equities declined -0.8%, with DM markets down 0.65% and EM markets down -1.5%.

 

The S&P500 fell -0.56%, the NASDAQ Composite -0.59%, the Dow Jones Industrials -0.25% and the Russell 2000 Index of small capitalization companies declined -0.73%.

 

European and Asian equities were  also lower for the day, with their aggregate indices, the Bloomberg Europe, Middle East and Africa (BBG EMEALS) and the Bloomberg Asia Pacific (BBG APACLS)  down -1.37% and -1.72%, respectively.

 

Back to US Economic Sectors:

While Real Estate led losses with a decline of -1.83% as interest rates increased, Consumer Staples provided the expected cushion on a down market with a loss of -0.07%.

 

Industrial metals and agricultural commodities declined, but gold and oil ended higher at $2,008/troy ounce and $72.84/barrel.

 

In Fixed Income and FX:     

The Bloomberg USD Basket (BBDXY) provided some marginal gains despite the EUR and GBP ending the day stronger at 1.0882 and 1.2679, respectively. The JPY declined -0.7% to 148.18.

 

UST yields increased across the curve. While the UST2yr yield gained 0.14% to finish the day at 4.36%, the UST10yr yield increased only +0.046% to finish the day at 4.1038%; the UST2-10yr spread declined -0.09% to -0.2591%.

What are we doing?

  • Tracking corporate earnings and Tier 1 data points for early signs of distress.

  • Central banks don’t usually provide monetary stimulus to support markets. Often, they pivot only when they “break (or nearly break)” something.


 


 

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