The Week Ahead

We’d like to take this opportunity to wish you all a very happy and prosperous 2024, and to thank you for your ongoing support. 

Having enjoyed the rally into the end of last year, 2024 has kicked off in a different vein, as market makers have dialled back their expectations for a rapid and accelerated Fed easing cycle, and the US jobs report further exacerbated the sell-off. The non-farm payroll figure smashed expectations for +175k, with 215k jobs added in December. Unemployment stuck at 3.7%, while average hourly earnings surprised to the upside at 0.4%mom and 4.1%yoy (versus calls for 3.9%). Interestingly, the labour force participation rate fell to 62.5%, the lowest reading in almost a year. Also of interest was the US service sector, which missed expectations, and plummeted in December, as the employment measure dropped to a ~3.5 year low.  

Ahead of the employment print, the Fed’s Barkin said “a soft landing is increasingly conceivable but in no way inevitable”, adding that he needs more conviction to support a rate cut. Minutes from the December meeting maintained a restrictive stance “for some time”, as FOMC members acknowledged that rates have probably peaked and will be cut by the end of year as “clear progress” has been made on the path of inflation. Over the weekend, the Fed’s Logan said the FOMC should not rule out another rate hike just yet. She also said the central bank may need to reduce the pace at which it shrinks its asset portfolio, due to the ripple effect on banks from liquidity stress; the discussion to slow the balance sheet runoff was first noted in the December FOMC minutes. Futures market bets for a cut in March moved from ~84% at the beginning of the year to 66.8% by close last week.  

The yield on the 10-year UST pushed through 4%, closing the week 17bps higher at 4.05%. Meanwhile, the S&P Index gained 0.18%. The dollar found its support once again; the DXY Index gained 1.06%. Meanwhile, oil was driven higher by geopolitical concerns, Brent closed the week 2.23% higher at $78.76pb. 

Last week, Chinese authorities said the nation is looking to expand investment and government spending to boost economic growth in 2024. There are expectations that the government may opt for a higher budget deficit to help reflate the economy, given uncertainties around consumption growth and external demand. Special bonds are seen as important for expanding investment. Meanwhile, Chinese authorities have taken steps to stabilise the renminbi amid extreme bearish market sentiment. Given the challenging global backdrop, China must ensure that appropriate measures are deployed to stimulate economic activity. Over the weekend, China reported its substantial fx reserves as increasing to USD3.238tn. 

Elsewhere, eurozone inflation picked up in December, amid an increase in energy costs. Consumer prices across the block rose to an annual rate of 2.9% from 2.4% in November; this was the first increase since April 2023. Although this could just be a blip, it has raised the question of when the central bank can start cutting rates; we’ll hear from the ECB after it meets on 25 January. Markets are no longer expecting a cut in March (44%) having begun the year betting for a 57% chance.  

This week’s highlights include US CPI (Thursday) expected at 3.2%yoy, the World Economic Forum’s annual risk report (Wednesday) and a bout of major bank earnings. Later today we have eurozone economic confidence and we’ll hear from the Fed’s Bostic. US trade figures are due on Tuesday. On Wednesday we have US wholesale inventories, and we’ll hear from Fed hawk Williams who speaks on the 2024 economic outlook. US CPI will garner much attention on Thursday as it is expected to rise marginally on a year-on-year basis. China’s inflation figures hit the screens on Friday, we then have UK industrial production and US PPI figures. The likes of Bank of America, Bank of New York Mellon, Blackrock, Citigroup, JPMorgan Chase and Wells Fargo report Q4 results. Ahead of that we’ll hear from the Fed's Kashkari, and ECB’s Philip Lane at separate events.