Macro Money - Market Analysis: December 21, 2023
Key Concepts:
- NFP (Non-Farm Payroll): A key US economic indicator representing the number of jobs added or lost in the economy.
- CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
- FOMC (Federal Open Market Committee): The branch of the Federal Reserve System that determines the direction of monetary policy.
- Basis Points: A unit of measurement used in finance to describe the percentage change in an interest rate or yield (1 basis point = 0.01%).
- Nowcast: A real-time economic forecast that uses high-frequency data to provide a current estimate of economic conditions.
- GDP (Gross Domestic Product): The total monetary or market value of all final goods and services produced within a country’s borders in a specific time period.
- Rate Hike/Cut: Actions taken by a central bank to raise or lower interest rates, influencing borrowing costs and economic activity.
Market Performance – Last Week’s Overview
Last week saw relatively muted market movement. The S&P 500 was down 0.1%, while the NASDAQ gained 0.4%. Bond yields decreased, with the 10-year Treasury yield falling 0.9% and the 2-year yield down 1.1% for the second consecutive week. Crude oil prices remained stable, influenced by geopolitical factors and concerns about a potential supply glut coupled with softening demand, as highlighted by forecasts from organizations like the EIA and OPEC. Gold continued its upward trajectory, reaching new record highs, driven by speculative narratives. The dollar held steady against the Euro, but weakened against the Yen following the Bank of Japan’s (BOJ) modest rate hike. Bitcoin experienced a 2.7% decline, signaling a cooling of risk appetite.
Geopolitical & Central Bank Actions
The Bank of Japan’s recent rate hike was described as “lukewarm,” suggesting limited scope for further aggressive tightening. The new Japanese Prime Minister, Takayishi, a protégé of Shinzo Abe, is reportedly averse to rate increases, potentially constraining the BOJ’s future policy moves. This resulted in a weakening of the Yen. The BOJ’s forward guidance indicated only one more rate hike is anticipated by the market, a view not strongly supported by the central bank itself.
Economic Data & Federal Reserve Policy
The US jobs report was described as “fuzzy,” providing arguments for both sides of the rate cut debate. Federal Reserve Chair Powell stated the labor market is losing approximately 20,000 jobs per month after adjusting for overcounting in NFP figures. However, the updated jobs report revealed a run rate of 50,000 job losses after the Fed’s adjustment, potentially strengthening the case for more aggressive rate cuts. Conversely, considering the entire year, the job loss rate is only 5,000 per month, a quarter of the Fed’s initial estimate.
Powell emphasized the Fed’s intention to “walk slowly” and “not rush,” aiming to assess the economic situation before making further policy adjustments. This cautious approach, however, is not favored by the markets, which are anticipating more substantial rate cuts. The market currently prices in at least 56 basis points (approximately two 25 basis point cuts) with a 24% chance of a third cut. The Fed’s own forecast remains at a single 25 basis point cut, unchanged from the September projection.
Inflation Data Analysis
Recent CPI data showed inflation at 2.7% (headline) and 2.6% (core), lower than the expected 3%. This data ostensibly supports the case for Fed rate cuts. Inflation is primarily driven by the service sector, which is showing a slow but steady decline. Goods inflation, influenced by tariffs, appears to be leveling off. The Fed believes that the impact of tariffs on goods inflation will likely diminish in the first quarter of next year due to base effects.
However, the quality of the CPI data was questioned due to a significant deviation from the Fed’s “nowcast” – the largest since the COVID-19 pandemic, potentially due to the government shutdown. Powell himself acknowledged concerns about data quality.
Market Sentiment & Volatility
Despite the positive inflation data, market sentiment remained uncertain. Trading volumes have declined significantly, increasing the potential for volatile price swings. The market is highly sensitive to the upcoming GDP data release, which is expected to be a key driver of sentiment. A weaker-than-expected GDP number could fuel recession fears, while a stronger number could dampen expectations for rate cuts.
Trading Strategy & Outlook
Elas Peback maintains a long position in gold, is positioned on both sides of the US dollar (short Aussie, short dollar against pound/euro), and is short risk via put verticals in IBIT (Bitcoin) and major indexes (NASDAQ, S&P, Russell). He anticipates potential erratic market behavior as the year ends, particularly given the low trading volumes and the importance of the GDP data release.
Notable Quote:
“We’re in a situation here seemingly where we’re going to get this data. It’s going to tell us something relevant, but it’ll be a question of whether the markets buy it.” – Elas Peback, commenting on the reliability of recent economic data.
Conclusion:
The market currently finds itself in a state of uncertainty, with conflicting economic signals and cautious central bank messaging. The upcoming GDP data release is poised to be a pivotal event, potentially triggering significant market movements. Low trading volumes exacerbate the risk of volatility. The year is not yet “over,” and investors should be prepared for potential erratic behavior as the holiday season progresses. The key takeaway is the delicate balance between weakening economic indicators and the Fed’s cautious approach to monetary policy, creating a complex environment for market participants.
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