Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Treasury yields whipsawed on conflicting reads from US NFP and ISM data, although details of the jobs report also hinted at a weakening job market. Stocks still ended the day slightly higher and focus turns to US CPI and bank earnings this week. Dollar was also broadly unchanged for the day, although it ended the week higher with JPY the weakest and GBP the strongest. Oil prices rallied on Red Sea and Libya concerns.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: The S&P 500 Index and the Nasdaq 100 Index edged up by 0.2% on Friday after an initial attempt to move higher in the morning faltered in the afternoon. The top-performing sectors in the S&P 500 were financials, utilities, and communication services. Investors' focus this week will center on the release of CPI data on Thursday, followed by the commencement of the earnings season, starting with leading banks on Friday.
Fixed income: Treasury yields initially surged in response to a hotter-than-expected headline payrolls growth and average hourly earnings. Despite reaching post-job report highs, yields later retreated when traders took notice of downward revisions to the prior two months. These revisions brought the 3-month average job growth to 165K, the slowest since January 2021. Treasuries rallied during mid-day as yields dropped, especially after the ISM Services index fell more than expected. The ISM Services Employment sub-index also plunged to 43.3, deep into contraction. In a volatile session, the 10-year yield rose again in the afternoon, finishing the day 5 bps higher at 4.05%, while the 2-year yield settled little changed at 4.38%. The December job report is unlikely to delay the Fed's first rate cut that may come as early as this March. Historical data compiled by Ned Davis Research indicates that the 10-year yield has fallen in the three months leading up to the first Fed rate cut every time in the last 12 rate-cut cycles since 1970.
China/HK Equities: The Hang Seng Index pulled back, declining by 0.7%. This downturn was attributed to weaknesses in Alibaba and Tencent, along with losses in pharmaceutical and consumer discretionary stocks. Alibaba saw a decrease of 3.2%, while Tencent retreated by 2.2%. Conversely, Chinese oil and gas, natural gas distributors, and telecommunications names defied the overall market decline, registering gains on Friday. On the mainland, the CSI 300 Index dropped by 0.5%. Despite increasingly attractive valuations, prevailing market sentiments remain sluggish, and the absence of catalysts suggests a lack of potential for a near-term rally.
FX: Dollar was higher in the first trading week of 2024 after ending the last three weeks lower as markets re-assessed the pace of easing priced in. Friday’s price action was choppy as NFP beat boosted the greenback, but ISM’s downside surprise pushed it lower only to finish almost unchanged. GBPUSD outperformed, reclaiming 1.27 to push to highs of 1.2771 only to reverse later to sub-1.2720. NZDUSD pushed back again from highs of 0.6278 while AUDUSD was higher at 0.6720 but ended the week lower after failing just above the 0.68 resistance. Yen remains a key focus with US CPI and Tokyo CPI up for release this week, and USDJPY is back below 145.
Commodities: Oil prices rose in the first week of 2024 amid tensions in the Red Sea and supply disruptions in Libya. US Secretary of State Antony Blinken warned the Israel-Hamas war could “easily” spill over into a full-blown regional conflict. Supply risk in the region was highlighted by Maersk announcing it would divert all vessels away from the Red Sea for the foreseeable future. Saudi Arabia announced greater-than-expected price cuts, highlighting demand concerns again and putting the focus back on OPEC+ cuts. Copper was down 3% for the week, and China’s inflation data this week may be the next catalyst to watch, while Gold also ended the week lower and US CPI will be on watch.
Macro:
Macro events: US New York Fed survey of consumer expectations (Dec), US consumer credit, US Manheim used vehicles index (Dec, final), Germany factory orders (Nov), Eurozone retail sales (Nov), Eurozone consumer confidence (Dec), Japan markets closed for holiday.
Earnings: Jefferies Financial
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