Nasdaq tumbles as bonds sell off, Gold holds historic highs

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.

TODAY’S MAJOR NEWS

How soon, and how many rate cuts?

That’s the question that traders hope to find answers to when the FOMC releases the minutes of its December meeting tomorrow. Wall Street interpreted the central bank’s statements as an obvious pivot in December. Fed fund futures trading reflects nearly 80% odds of at least a 25-basis-point rate cut in the March meeting, with up to 150 basis points of cuts expected by the end of the year. However, that could be an overly optimistic expectation based on Fed statements and recent economic data (with some critical jobs data due this week).

Conquering inflation, which means two percent or less, is the Fed’s main requirement before cutting interest rates. Market expectations for inflation, the so-called Five-Year Breakeven Inflation Rate, is now 2.22% (the difference between the yield on inflation-protected and nominal Treasuries of similar duration currently 3.95% less 1.73%). So far so good.

Key jobs data will shed light on rate cuts 

Jobs will be in focus this week, and the peak effect of the Fed’s rate hikes on the labor market is just about hitting. Non Farm Payrolls on Friday are expected to show 168,000 jobs added in December (versus 199,000 in the prior month), unemployment at 3.8% (versus 3.7%), and average hourly earnings up 0.3% on the month (versus 0.4%). The Job Openings and Labor Turnover Survey (JOLTS) data is also published on Wednesday.

Recent remarks by FOMC officials suggest they’re worried the unemployment rate is on the verge of a persistent increase, and they saw that number would be closely watched. San Francisco Fed President Mary Daly said, "when the unemployment rate starts to rise, it tends to go up by a lot and not by only a little bit.” That suggests she doesn’t see the Sahm rule breaking down. Cleveland Fed President Loretta Mester also warned against dismissing the last hard mile of inflation, noting that “the dynamics in labor markets could change.” Philadelphia Fed President Patrick Harker said he’s hearing from contacts that “things are starting to soften in the economy, maybe faster than the data says.”

December’s bull market was all-inclusive

Every sector was down in December 2022, but 223 was the polar opposite with every sector up for the month. The S&P 500 closed out last year with a 26% total return, relative to down 18% in the previous year. The top performing sector for 20223 was Technology and Communication Services, both up over 50%, thanks to the outperformance of the “Magnificent Seven.” Consumer Discretionary also outperformed the S&P 500 this year, by nearly 40%, helped by Amazon’s 81% performance and Tesla's up 102% in 2023.

Rising commodity prices could spark renewed inflation

StoneX commodity economic Arlan Suderman argues that there are early warning signs from buoyant commodity prices, suggesting that lower interest rates and a stronger economy ‘could’ re-ignite inflation. He points out that the 10-year correlation between our StoneX Commodity Tracker and the Five-Year Breakeven Inflation Rate is a statistically significant 0.87 currently. Suderman poses an interesting question: are we moving from commodity deflation, which has been the case for the twenty-one months in which the Fed has been raising interest rates, into a period in which commodity prices and inflation both rise?

Will the Fed's perceived pivot that spurred the Wall Street rally create enough fresh consumer demand for goods, services, and housing to raise inflation expectations again? Suderman believes it might: “I am in the camp of those who believe that will be the case, and this could flip the narrative on commodities in 2024. Keep in mind that the 10-year correlation between our StoneX Commodity Tracker and the US consumer price index is 0.89 – even stronger than the correlation with inflation expectations.” This assessment would increase the price of basic commodities like grains, oilseed, and oil.

TODAY’S MAJOR MARKETS

Nasdaq leads market sell-off

• NASDAQ fell 1.6% this morning, with the S&P 500 down 0.5%, while the Dow Jones and Russell 2000 were essentially unchanged
• The Nikkei 225 and FTSE 100 were down 0.2% overnight, while the DAX was up 0.1%
• The VIX, Wall Street’s fear index, rose sharpy to 13.4

Dollar rallies, bonds weaker

• Bonds were markedly weaker, with10-year TIPS index-linked yields at 1.73%, and 2- and 10-year yields rising to 4.30% and 3.95%, respectively
• The dollar index rose 0.8% to 102.1
• Versus the Dollar, the Yen, Sterling, and the Euro were all down 0.8%
• Btcoin's rally continued, up 3.6% to $45,058

Oil sells off, gold holds on to highs

• Oil prices fell 0.8% to $71.1 per barrel
• Gold prices held onto recent gains at $2,072 per ounce, while Silver prices fell 0.6% to $23.9 per ounce
• The grain and oilseed sector fell, with the strong Dollar triggering selling, along with soft demand prospects amid ample supplies
• Soybean and corn prices both accelerated to the downside as Algo trading jumped on the break of key chart support during the session
• The primary exception among the major commodities was in the protein sector, where both live cattle and feeder cattle future found active buying to start the week and the new calendar year's trading

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]