The week that was

The week was characterized by conflicting data and mixed messages from the Federal Reserve.  Dissonance is defined as a “lack of harmony among musical notes” and I find it a particularly apt term to describe markets as we begin the new year.  We had a strong US payrolls report to end the week only to be followed subsequently by a large decline in the employment component of the ISM services report.  December’s Fed meeting and projections were received as unequivocally dovish where as the release of that meeting’s minutes this past week contained a higher degree of uncertainty than was previously communicated. The “dissonance” or lack of harmony was even seen in energy markets where we saw a 5.5m barrel draw in crude inventories but a 10.9m barrel build in Gasoline stockpiles.  Trouble in the Red sea and unrest in Iran further clouds the picture as it remains unclear whether the impact of these events will ultimately affect global trade and crude oil supply.  The growing uncertainty around Trump’s eligibility to run for office and the potential for domestic political volatility ahead of elections this year has also perhaps unnerved equities which have started the year on a weak footing.

Central Banks

While some of the Federal Reserve’s members air out caution to the market, I think fundamentally the upcoming easing cycle has been somewhat misunderstood. We are now 4 years on from the advent of the pandemic and 2024 should be viewed as a return to normalcy of sorts as far as markets are concerned.   In that context, having a real rate of close to 3% is just not necessary anymore.  Irrespective of whether the economy slows down meaningfully or not, as long as inflation continues to be on a downward path, it will be incumbent on the Fed to begin easing policy. The length and breadth of that cycle will ultimately be determined by the evolution of the data, the timing however SHOULD NOT be data dependent.

In the coming days and weeks, the more clarity the market can receive from Chairman Powell with regards to the timing of the easing cycle the better it will be for markets. To that end, upcoming data on inflation and the Fed meeting itself towards the end of the month will be crucial in reducing the uncertainty that currently pervades global macro markets.

The week ahead

In the US, we have a 10y note auction along with oil inventories on Wednesday, followed by the inflation report due to be released on Thursday.  Over in Japan, we have the release of cash earnings on Tuesday, a number which is closely watched by the BOJ.  China also releases key inflation and trade data on Thursday which will be of particular interest to markets.

As always, we’ll keep you posted.

Have a great weekend

Disclaimer

The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision. 

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