Markets
After a dip on Tuesday, where the proximate drivers were unclear as macro data did not indicate anything exceptional regarding economic strength or weakness, U.S. benchmarks are back in the Goldilocks mood on Wednesday, pushing higher, particularly in the technology sector, rebounding from a forbidding start to 2024. The S&P 500 is back trading within 1% of its all-time high, established over two years ago.
Investors are gearing up for the release of new inflation data on Thursday, eager to glean insights into the timing of potential interest rate cuts by the Federal Reserve. Despite some concerns among Fed members about inflation re-accelerating, they remain entirely emphatic about incoming economic data driving their policy decisions. Consequently, any substantial decrease in CPI inflation could become a critical focal point for market participants in shaping early 2024 rate-cut expectations.
According to various indicators, it appears that U.S. inflation is set to continue its deceleration throughout the remainder of this year, potentially reaching the Federal Reserve’s 2% target by the end of 2024. In some cases, prices for certain goods have already begun to decline. This downward trend is expected to keep the U.S. central bank on track to initiate interest rate cuts, with some optimists anticipating the possibility of cuts as early as March.
Wall Street is also gearing up for the fourth-quarter earnings season to commence in earnest on Friday, with reports from JPMorgan and others set to be released.
Analysts forecast that S&P 500 companies will report a second consecutive quarter of earnings growth.
The 10-year U.S. Treasury note yield has become a focal point and remains a source of steady calm as rate cut expectations have investors reaching for the duration. However, beyond the anticipation of rate cuts, other factors are likely contributing to the bond market’s tranquillity amid substantial funding requirements from the U.S. government.
A notable comment from Federal Reserve Bank of Dallas President Lorie Logan on January 6 is gaining traction. Logan emphasized the need for an urgent discussion about slowing down the balance sheet runoff, irrespective of the potential impact of improved financial conditions resulting from higher stock prices and lower bond yields on the timing of the first rate cut. This urgency stems from the rapid depletion of the Reverse Repurchase (RRP) facility, and once exhausted, Quantitative Tightening (Q.T.) will start affecting reserves.
Therefore, speculators think that if the Treasury were to continue shifting issuance more towards bills instead of coupons, deviating from market expectations, it could compel the Fed to expedite the timeline for winding down Q.T. This scenario, naturally, would be perceived as bullish for risk assets.
Hence, any test of record S&P 500 highs may have to be cleared through Janet Yellen’s Treasury desk, not necessarily Chair Powell’s Fed desk.
Oil market
Oil prices experienced a reversal lower following an initial-session uptick, facing notable selling pressure as the Energy Information Administration (EIA) reported substantial builds in U.S. crude and refined fuel stockpiles during the first week of 2024. Despite this downturn, the weaker U.S. Dollar Index (DXY) and concerns regarding a broader escalation in the Middle East are expected to support the oil market. There might also be an accumulation of weekend headline risk hedges on deeper declines. However, without the support of the GPR index, building a bullish case for oil markets remains challenging, particularly in an environment characterized by oversupply amid declining demand.
Forex market
Markets are subtly positioning through the U.S. rates channel for a weaker U.S. dollar. But not all crosses are created equally these days. USDJPY, for instance, has moved higher as JPY speculators dive into the USD carry trade on the expectation that the BoJ will remain in easy money mode into H2.
