The onset of 2024 has brought a somewhat lackluster beginning for equity markets worldwide, following a positive close to 2023 where European markets achieved near-record highs and the Dow and Nasdaq 100 set new records. The current subdued market tone contrasts with the unexpectedly resilient end to 2023, driven by heightened expectations of multiple rate cuts from central banks in the coming months.
Recent days have witnessed a scaling back of these rate cut expectations as bond yields rise on slightly better-than-expected economic data. Toward the close of last year, US bond yields declined, anticipating significant rate cuts by the Federal Reserve in the first half of this year. However, the current economic resilience of the US, reinforced by the latest December payrolls numbers, makes a March rate cut by the US central bank highly unlikely.
The downward trend in yields accelerated after the Federal Reserve revised down their 2024 dot expectations, hinting at the possibility of rate cuts in the future. Market participants, surprised by this pivot, quickly adjusted their rate outlook for 2024. While the minutes of this week showed discussions on rate cuts, the direction for policy remains uncertain, suggesting rate cuts might be several months away.
Recent labor market data in the US continues to depict a solid economy, with JOLTs data showing a modest slowdown in vacancies and weekly jobless claims decreasing. Attention now turns to the December payrolls report, where expectations are for 171k jobs to be added, with the unemployment rate expected to edge higher to 3.8%.
In Europe, despite signs of improvement in recent PMI numbers, the economy remains weak, with headline inflation slowing to 2.4% in November, close to the ECB‘s target. Today’s headline CPI numbers for December are expected to show an uptick to 3% in headline CPI, while core prices are expected to slow to 3.4% from 3.6%. Weakness in the EU economy supports the idea that the ECB may be the first to cut rates in the coming months.
Currency markets reflect these uncertainties, with EUR/USD remaining in an uptrend but facing resistance at 1.1030, GBP/USD in an upward trajectory toward 1.3000, and EUR/GBP maintaining a range between 0.8570/80 and 0.8720. USD/JPY has found support at 140.00, rebounding above the 200-day SMA at 143.20.
As the day unfolds, FTSE100 is expected to open 39 points lower at 7,684, DAX 90 points lower at 16,527, and CAC40 33 points lower at 7,417. Investors are closely monitoring economic signals and central bank moves in anticipation of market shifts in the coming months.