Paul Walton

Today’s payroll data reiterated the run of strong labor market data with wages growing at 4% a key concern for the Fed. Futures markets reduced the probability of early rate cuts, but traders made few changes to their bullish stance on equities, bonds, gold or the dollar.

The Dow Jones has quickly shaken off yesterday’s late losses is challenging record highs despite the comedown of the Fed minutes yesterday. The market remains optimistic over the state of the US economy, supported by today’s various jobs sector data releases; the flip-side is that too much strength could slow the pace of interest rate cuts with the Fed “likely at or near its peak rates” according to December policy meeting minutes yesterday. The Bitcoin rally will be tested pretty soon, as the SEC is intended to approve (or not) Bitcoin ETFs.

Oil prices appear to have found support at $70 per barrel, with news of US stock building, further OPEC+ production cuts and Middle East tensions spurring buying action. The Fed’s December meeting minutes were cagey on the outlook for interest rates in 2024. JOLTS labor market data pointed to further weakness, good news for inflation.

Equity, bond, and gold investors are pricing in large rate cuts in 2024, starting in March, but this week’s jobs data could spoil the fun. A bullish December for stocks might have pulled forward the typical January rally, spurred by the belief that the Fed is about to pivot. US Treasuries sold off in morning trade, with worries about the appetite to digest the major volume of new issues. There is some risk of disappointment in the interest rate outlook, notably with commodity prices indicating persistent inflation so there is less chance of a rate-cutting bonanza.

Chinese industrial firms’ profits surged in the second half of 2023, but businesses still suffer from flat demand and profits well below peak levels. This low profitability curtails firms’ spending and hiring plans, hurting consumer confidence. Many Chinese tech and new energy stocks are looking cheap on global comparisons. The Chinese government encourages local governments to issue large bonds to finance infrastructure spending to support demand. Despite various local schemes to boost activity, the housing market continues to be mired in a cycle of low transaction volumes and no price increases. All of this makes the Chinese consumer cautious and unwilling to spend, which, in turn, curbs economic growth.

The Russell 2000 was again the strongest US index, continuing a trend evident for two months. Gold prices touched $2,082.5 per ounce this morning, buoyed by a mixture of risk aversion and the anticipation of lower interest rates. This morning’s economic data showed strong durable goods demand and a modest decline in a key inflation gauge, the ‘PCE deflator’, generally supporting rate cuts early next year.

China’s Shanghai and Shenzhen equity markets ended a dismal year between 7% and 11% down on the year, drifting lower in the second half of the year as the property sector decline hit consumer sentiment and the wider economy. The offshore yuan fell 6% versus the dollar by mid-year, as traders looked for much need interest rate cuts, but rallied to end the year down 3%. While China isn’t back to its previous strong economic growth rates, there are signs of recovery, with forecasts for 2024 anticipating 5%-plus GDP growth and an end to deflation as property sector debts are resolved.

US equity markets bounced back in morning trade, again led by the Russell 2000, after yesterday’s worries about the pace of rate cuts, as traders ignored anything but a rosy rate cutting in 2024. Oil prices slipped, down 1.3%, despite various indications that oil output will be cut next year by Saudi Arabia and Russia, the world’s top two producers.

Consumer confidence rose sharply in December, casting a shadow on early rate cuts and stalling the recent equity market rally aside from continued strength in the Russell 2000. Equity markets and gold still look set to end the year on all-time highs, Bitcoin has close to doubled, with interest rate optimism seemingly pulling forward the traditional January rally.