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Craig Farley, of Team Asset Management, offers a weekly round-up of global markets
Much like the mountaineer crushing a steady climb, the major US stock indexes continued their ascent, with the bellwether large-cap S&P 500 Index, the tech-laden Nasdaq index and the Dow Industrials index each recording further gains this week.
Embracing FOMO (fear of missing out), retail investors bought over $7 billion of stocks in the past five trading days, propelling the S&P index to its highest closing level since March 2022.
The key datapoint was the release of Friday’s US jobs report, which came and went without much fuss. The lens of the market has become hyper-sensitive to the unemployment picture on the basis that a deterioration in the jobs market is almost certainly required if the Federal Reserve (“the Fed”) is going to begin reversing the path of interest rates in 2024. As it stands, the market is currently forecasting more than four separate cuts next year, commencing in the first quarter.
November’s job growth figure of +199,000 was above October’s jobs growth figure of +150,000, but below the 12-month average of +240,000. Bond yields “backed up” (lingo used by bond investors to describe a move higher in yields), pressuring bond prices on expectations that a still-healthy labour market is likely to make Chairman Powell and colleagues think twice about cutting just yet.
What might give Powell & Co some ammunition is the latest University of Michigan survey, which found that inflation expectations among US consumers – the primary growth engine of the economy – fell to their lowest level since March 2021. All told, consumers responded that they expect the annual inflation rate to be approximately +3.1% 12 months from now, sharply down from the +4.5% figure reported in the November survey. Inflation expectations are an important component of the toolkit the Fed uses in assessing whether inflation is probably “contained” or may have the capacity to flare up again in the future.
Elsewhere, the Chinese stock market must be one of the contenders for most disappointing investments in 2023. The much-hyped Covid economic rebound has proved for the most part to be a damp squib, with ongoing issues in the property sector casting a large shadow over investor sentiment. The domestic stock market index is now at a five-year low, while a measure of the property sector index has, incredibly, returned to Global Financial Crisis levels.
Turning to the commodity sector, oil has almost fully round-tripped its second-half rally this year, with WTI crude back at $71 level on abundant short term supply concerns. Gold has regained its allure, briefly touching new all-time highs of $2,100 in nominal terms before settling back under the psychologically important $2,000 level. Central banks are on pace to buy over 1,000 tonnes of the yellow metal this year. It is worth noting that these institutions once held 80% of their balance sheet in gold vs. 20% today.
The crypto market remains in the spotlight, continuing its strong rally year-to-date, but cooled off over the weekend. The leading digital currency by market capitalisation, Bitcoin, declined to finish the week at around $41,000, after previously reaching a high of $45,000, a 2023 high. Little surprise that selective traders might be capitalising on the profits from the surge observed recently.
Looking to the week ahead, investors have plenty to keep an eye on, including a monthly Consumer Price Index report, a monthly update on US retail sales, and, crucially, a US Fed meeting that concludes today.
While there is prevailing confidence that the Fed will keep interest rates unchanged at its final meeting for the year, market watchers will be searching for clues in rhetoric and body language over the timing of potential cuts in 2024.
