US economy

Stocks rallied from early losses this morning as traders weighed this morning's jobs report and positive consumer sentiment data all of which pointed to which pointed to a soft landing. Futures markets pushed out the much hoped-for first rate cut to next summer echoing some Fed official’s mantra of ‘higher rates for longer.’ Predictably, bond yields and the dollar rose, while gold fell back from its peak.

The Yen was very strong versus the dollar, hitting a 3-month high of 151.35 after traders anticipated a rate hike from a comment by Bank of Japan’s Governor Kazuo Ueda. The oil price dipped below $70 per barrel for the first time since June. The Dow Jones barely held on to recent gains in morning trade, with the NASDAQ up 1.4% and the S&P 500 up 0.8%. Fundamental direction has been thin with jobs data mixed thus far, and the official employment report still on tap tomorrow morning.

The oil price slid 4% to $69.4 per barrel on fears that promised OPEC+ production cuts wouldn’t be enough in the face of weaker demand. Gold continues to flirt with all-time highs. Bond yields are moving down to levels seen over the summer, helping to lower mortgage rates and boost activity in the property market. Equity markets marked time ahead of key labor market data.

We consider factors which are boosting crypto prices, not just the Bitcoin rally. Optimistic scenarios that drove the equity market to new highs are giving way to more realistic view that the Fed will not be able to swing quickly to rate cuts in early 2024. The CME’s FedWatch shows traders expecting a 50 bps rate cut by June and at least 125 bp for 2024, in contrast with the latest Fed dot plot that shows a wide range of expectations from Fed participants, anticipating a 50 bp more modest reduction.

Bullish factors The contraction of the Brazilian GDP in Q3 is expected to reduce the attractiveness of Brazilian assets and reinforce the need to cut the basic interest rate (SELIC), which could decrease foreign investments in the country and weaken the BRL. Bearish factors Slightly positive data for the American economy can reinforce the perception that the Federal Reserve will not raise interest rates further and contribute to the global weakening of the USD. Disclosure of data for the Chinese economy can reinforce the perception of a faster rebound, favoring currencies' performance from commodity-exporting countries like Brazil.

Bitcoin has risen 20% in the past four weeks, hitting an 18-month high, boosted by speculation that interest rates have peaked and hopes for a major Bitcoin ETF launch. Other than bargain hunting in the Russell 2000, up 1.0%, US equities were down on profit-taking. Gold took a pause and stepped from recent all-time highs. The oil price continued its downward move despite last week’s announced OPEC+ production cuts.

The Dow Jones made another all-time high of 36,265 in morning trade, despite Fed chair Powell trying and failing to talk down hopes that interest rates will be cut in the spring. Gold rose 1.6% to a new all-time high of $2,089 per ounce. Paradoxically, weaker manufacturing data, and the belief that interest rates have thus peaked is the best explanation.

The Dow Jones achieved an all-time high of 35,802 in afternoon trade, signifying the equity market’s bullish tone spurred by hoped-for interest rate cuts. Traders are placing a 40% probability of a March rate cut in the Fed Funds rate. The Fed’s favored inflation measure cooled to 3.5% annual growth, welcome but still above its 2.0% target.

Oil prices were volatile as news emerged of wrangling between Saudi Arabia and other OPEC+ members, with the growing suspicion that the Kingdom wants higher prices to be achieved through further production cuts. Sterling continued its recent rally after a growth-inclined budget statement and a worsening inflation outlook, pointing to higher UK interest rates for longer.

Equity markets acknowledge little risk in coming months, judged by the Vix, Wall Street’s fear index, which dipped to a decade low of 12.9. Whether this is bullish, bearish, or has no real message is unclear. Elsewhere, the Russell 2000 and Nasdaq were up 0.7%, the dollar rallied, and Gold held above the $2,000 mark. Oil prices fell 1.0% despite the likelihood that OPEC+ will extend supply cuts.

Fed minutes of its last meeting dampened hopes of early interest rate cuts after lunch, with the cyclical and small-cap Russell 2000 off 1.1% and Nasdaq off 0.6% despite some AI-linked stocks rallying. Elsewhere, gold passed the 2K mark for the first time since May, but the rally in Oil wasn’t sustained. Sterling was firmer against the dollar on the eve of the UK Budget.

Nasdaq stepped back into its role as a market leader, up 1.2% in morning trade, even though the senior team at OpenAI jumping ship to join Microsoft was the only headline from the sector. Bonds rallied modestly on further talk about early interest rate cuts on last week’s inflation-friendly data run. Oil’s resurgence was the big story, up 2.7%, on expectations of more OPEC+ production cut following recent sharp price losses.

Gold has traded in a $61 range over the past fortnight and now holds around $1,970. Silver has been more positive; after dropping towards $22, it rallied hard to more than $24 before easing. While gold’s range was 3.2% (as a percentage of the low) over the week, silver’s was 10.3%, more significant than the average 2.0-2.5 beta, and much of the silver move looks like short covering.

Bullish factors Uncertainty about the viability of budget targets in 2024 may increase risk premium requirements by investors for Brazilian assets and diminish foreign investments, weakening the real. Argentine elections can increase the perception of risks for other countries in the region and temporarily decrease managed money for Brazil, weakening the real. Bearish factors Disclosure of the minutes of the FOMC decision can reinforce the perception that American interest rates have already peaked and contributed to weakening the dollar.

Today’s 4% rebound in the oil price, reversing some part of a twenty-point fall, was the main talking point on Wall Street. As discussed below, falling oil prices have led to declining bond yields. Fears of oil over-supply are diminishing as the outlook for the world economy improves, leading to the oil price rebound. Equity markets were quiet, with the cyclical Russell 2000 again leading. The dollar was generally weaker.

The Russell 2000 was off 1.7% in morning trade as traders had second thoughts about the Fed’s appetite for interest rate cuts, which had driven a four-day rally. Bond markets stabilized after a significant yield fall, and dollar weakness persisted. The government is now funded through January 19th. Still, Wall Street is focused on today’s bigger-than-expected rise in weekly jobless claims, raising concerns about the health of the US economy. Oil was off 3.7% as the market digested yesterday's data that showed oil stocks being rebuilt and fears of a slowing world economy.

Equity markets slowed their advance on yesterday’s better CPI inflation data despite supporting data from falling PPI inflation and flat retail sales data, as bond yields rose, reversing yesterday’s strong rally. Slower retail sales mean that higher interest rates are doing their job at cooling inflation, allowing the Fed to pivot its monetary policy next year -- but it also means that the economy isn't doing well. The dollar stabilized, and oil prices saw profit-taking. Traders are rethinking the bullish view that interest rates have peaked.