Equities dropped lower to start the year. 10Y treasury yields went up this week after nonfarm payroll data came in higher than expected (216k actual vs 170k expected). Unemployment rate remained unchanged. Q4 2023 earnings season starts next week.
Dovish: According to the FOMC minutes, Fed officials believe that rates are at or near the peak. Restrictive policies are possible as they move closer to the 2% inflation target. Core personal consumption expenditures (PCE) are expected to drop from 3.2% to 2.2% by December. Markets are pricing a 132bps rate cut by year-end, while the likelihood of a 25bps cut at March’s meeting dropped from 85% to 50%.
Real Estate: The forecast of 30Y fixed mortgage rates was revised down from 7.1% to 6.3%, driven by the expectation of rate cuts. Markets are expecting a higher home price appreciation because of the strong momentum recently, with the forecast revised up from 1.9% to 5% by the year-end.
Red Sea Tension: The attacks on shipping in the Red Sea corridor have increased concerns about the effect on oil prices, as 9% of the global oil transited through the Red Sea. Amid the escalating tensions in the Middle East, energy stocks and gold could be a good hedge against such risk.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Standard Chartered: After the sharp rally in Q4 2023, equities face technical resistance as global stock markets are close to all-time highs. The upcoming Q4 earnings season will be a key driver. Investors are recommended to re-enter the technology sector once government bonds consolidate.
Goldman Sachs: We expect the S&P500 companies as a whole will beat expectations, even if the bar of Q4 results is higher than other quarters last year. Earnings per share (EPS) are expected to be stronger, driven by the weaker dollar, lower interest rates, and stronger growth in the economy.
Morgan Stanley: The decline in inflation expectations was followed by the dropping real rates, indicating a Fed pivot. The 10Y treasury yield also tracked ambitious 2024 rate cut expectations closed in the previous year. Amid such a backdrop, the Fed must deliver and inflation must not be disappointed for bond returns to hold up.
UBS: We expect to see an upside in fixed income as rate cuts are ahead. Quality bonds are recommended due to the economic slowdown and drop in rates. In addition, they are likely to outperform in the scenario of hard landing.
UBS: The strong jobs data could increase the concerns that the delay of rate cuts schedule or cut less than expected. At the current unemployment level, it is unlikely that there will be a sharp increase in rainy-day savings and reduction in household consumption.
Goldman Sachs: We expect to see core PCE inflation drop below 2% in 2024. The impact of lower inflation on corporate earnings is mixed, as it is a tailwind for margins but a headwind for sales. If the cost of inputs, such as wages grows slower than the prices charged, the margins could edge higher.
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