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Weekly Market Update (December 10, 2023)



HIGHLIGHTS

Equities are flat this week after the sharp rally last month. 2Y treasury yield jumped as markets are reversing the expectations of rate cuts. It is pricing a 50% likelihood of a cut in March, dropped from 65%.


Firm Economic Data: Nonfarm payrolls increased more than expected (199k actual vs 185k expected) while the unemployment rate dropped lower than expected (3.7% actual vs 3.9% expected). Other than the job data, consumer sentiment index increased and the 1Y inflation expectation dropped significantly.


Small Cap: Demand for small-cap stocks jumped, as markets are seeking investments that could potentially outperform in a low-rate environment. The demand for call options for small-cap companies increased significantly. Their open interest is at all-time high.


China: The domestic demand is expected to be lower in Q4. It is supported by the increasing borrower defaults, deepened housing slump and the big miss in imports.

 
MARKETS

Nasdaq

14,403.97

+0.69%

S&P 500

4,604.37

+0.21%

Dow

36,247.87

+0.01%

10-Year

4.25%

+2bps

Brent

75.84

-3.85%

DXY

104.01

+0.72%

*Data as of market close. 5-day change ending on Friday.

 
VIEW FROM THE STREET

Equity

Morgan Stanley: The upside in the coming year will require more good news, as the confirmation of the Fed’s pivot will not be enough. The upside surprise is constrained as the starting points matter. P/E ratio has increased as the earnings estimates have dropped. Volatility index (VIX) is also at a low level, near the pre-pandemic low.


Standard Chartered: Indian equities hit all-time high this week, mainly driven by the recent state elections. The demographics are also favorable as the population in the working-age bracket is high. Sentiment is positive due to the policies, such as tax and infrastructure development.

Fixed Income

J.P. Morgan: Markets are speculating on when the Fed will cut rates. The Fed Fund Futures are pricing in a 50% and 100% likelihood of rate cuts in March and May respectively. However, we do not expect a rate cut until the second half of next year.


Barclays: The solid job reports made the markets temper the rate cut prediction again. We expect the Fed will reinforce this in the coming week, by retaining the tightening bias and implying just two cuts next year.


Economy

Morgan Stanley: The excess in savings, which is the main driver of the 2023 consumption, is likely to be exhausted. The credit card delinquency rate rebounded back to the pre-pandemic level, with higher credit card balances. It implies that the spending in 2024 is more likely to disappoint the upside.


UBS: The perfect outcome for markets would be the slowing in growth is enough for the Fed to cut rate but not so abruptly as to trigger recession. Markets are pricing this scenario now. VIX is low, and we think is a signal of over-confidence.

 
KNOWLEDGE TRANSFER

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DISCLOSURE

This newsletter is meant for informational purposes only and is not investment advice. Always consult a licensed investment professional before making important investment decisions. Advertising and sponsorship do not influence editorial content or decisions. Market Hedwig is not responsible for the promises made or the quality or reliability of the products or services offered in any advertisement.



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