In the first notable development of 2024 trading, the US economic calendar has provided crucial insights into the economic landscape. The data suggests a Goldilocks scenario, where growth is stabilizing at a low but non-recessionary level. The labor market shows signs of easing, coupled with a persistent disinflationary trend.
The manufacturing ISM index, although recovering slightly more than expected (47.4 from 46.7), continues to linger below the crucial 50-point threshold, marking the 14th consecutive month in recessionary territory. Key details reveal a mixed picture, with production and export orders stabilizing, while job cutting slows. However, domestic new orders experienced a more rapid decline. The prices paid gauge in the ISM report reached a six-month low of 45.2, influenced by cheaper commodities, particularly oil prices.
JOLTS job openings decreased from 8.85 million to 8.79 million, hitting the lowest level since early 2021, though remaining significantly above pre-pandemic peaks. The quits rate dropped to 2.2% from 2.3%, signaling a decrease in confidence to switch jobs. The early release of US data, coupled with the FOMC Minutes from the December policy meeting, injected new momentum into US Treasuries.
Surprisingly, the FOMC Minutes featured a paragraph on the balance sheet run-off, with some participants suggesting discussions on the technical factors determining when the central bank will slow its quantitative tightening process. The Fed, which commenced QT in June 2022, currently allows $60 billion of Treasuries and $35 billion of mortgage-backed securities to mature monthly without reinvesting the proceeds. The minutes did not provide a clear indication of the equilibrium reserve level.
Daily changes on the US yield curve ranged between -1.3 bps and +0.9 bps, with the belly of the curve outperforming the wings. German yields also experienced a drop. The bond market’s newfound strength halted the dollar‘s momentum, with the trade-weighted greenback leveling off near 102.50. Stock markets, however, failed to capitalize on the shift, with key European indices losing up to 1.5% and US benchmarks sliding up to 1.2%, notably the Nasdaq.
In other news, the South Korean government adjusted its economic policy plan, revising its growth estimate for 2024 down to 2.2% from the previous estimate of 2.4% in July. The government anticipates 2023 growth at 1.3%, with inflation expected to remain somewhat higher at 2.6%, up from the July estimate of 2.3%. Despite a more modest rebound in activity, the government acknowledges challenges in domestic demand and people’s livelihoods due to persistently high inflation and interest rates. To counter these challenges, the government plans to implement tax and tariff cuts, cap utility prices, and extend tax incentives to support investment, aiming to bring inflation back to 2% in the first half of the year.