It’s the time of the year!

Thoughts of the Day

Approaching year-end, financial institutions commonly make predictions for the upcoming year. However, we don’t share such responsibilities, our focus is on making profits. With the US Federal Reserve’s data-dependent stance, we reserve judgment until the situation becomes clearer. As always, we seek asymmetric opportunities.

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Day Ahead

Nothing noteworthy on the horizon today.

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What Happened Yesterday

Market Movements as of New York Close 27 Nov 23
  • The US Treasury Yield curve inversion remained at 0.45% as the US 2-year bond yield and the US 10-year bond yield fell -0.08% to 4.84% and 4.39% respectively.
  • The US stock futures eased through the Asian trading session with the S&P 500 futures falling to a low of 4552 (-0.36%) from 4568.5. It then started to grind upwards when the London session began, effectively causing the S&P 500 to have a net loss of -0.16% on the day before the New York session began.
  • The US stock market opened lower from Friday. However, trading of the US stock market was kept within a small range. Consequently, the S&P 500 closed -0.20% lower (high: +0.03%, low: -0.29%), the Dow Jones fell -0.16% (high: +0.06%, low: -0.31%) while the Nasdaq inched -0.13% lower (high: +0.40%, low: -0.31%).
  • The crypto market traded on a weaker note along with the US stock market. Bitcoin is down -0.33% while Ether is down -1.68%.
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Headlines & Market Impact

US recession will prompt 175 basis points in Fed cuts next year, DB economists say

Notable Snippet: The Federal Reserve will cut rates more aggressively than markets are currently pricing in as a mild U.S. recession arrives in the first half of next year, economists at Deutsche Bank (DBKGn.DE) projected on Monday.

In an outlook report, the Deutsche Bank economists projected 175 basis points in rate cuts in 2024.

With the Fed rate currently at 5.25%-5.5%, that would reduce the rate to 3.5%-3.75% by the end of the year. Traders are currently pricing at a rate of 4.48% by December 2024, according LSEG data.

Deutsche Bank expects two quarters of negative economic growth in the first half of 2024, which leads to a “pretty sharp rise” in the unemployment rate to 4.6% by the middle of next year from 3.9% now, said Brett Ryan, the bank’s senior U.S. economist, in an interview with Reuters.

“We see the economy hitting a soft patch in the first half of the year that results in a more aggressive cutting profile starting in mid-year,” he said.

At the same time, the bank expects that the economic weakness “eases inflationary pressures,” Ryan said.

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Higher mortgage rates weigh on US new home sales in October

Notable Snippet: Sales of new U.S. single-family homes fell more than expected in October as higher mortgage rates squeezed out buyers even as builders cut prices, but the setback is likely temporary amid a persistent shortage of previously owned houses on the market.

The decline in sales reported by the Commerce Department on Monday was in line with a recent deterioration in homebuilder sentiment, which came as the rate on the popular 30-year fixed-mortgage approached 8%, leaving builders anticipating slower buyer traffic. Mortgage rates have since retreated from two-decade highs and are at levels last seen in late September, which could pave the way for a rebound in sales.

“The market for new homes remains very solid by any historical standard and continues to be boosted by extremely low existing home inventory,” said Daniel Vielhaber, an economist at Nationwide in Ohio.

New home sales dropped 5.6% to a seasonally adjusted annual rate of 679,000 units last month, the Commerce Department’s Census Bureau said. September’s sales pace was revised lower to 719,000 units from the previously reported 759,000 units.

Economists polled by Reuters had forecast new home sales, which account for 15.2% of U.S. home sales, would fall to a rate of 723,000 units. The share is the largest in at least a decade.

New home sales are counted at the signing of a contract, making them a leading indicator of the housing market. They, however, can be volatile on a month-to-month basis. Sales increased 17.7% on a year-on-year basis in October.

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Wells Fargo unveils 2024 target, warns of ‘really, really sloppy’ first half for stocks

Notable Snippet: Chris Harvey, the firm’s head of equity strategy, sees a volatile path to his S&P 500 to 4,625 year-end target.

“It’s really hard to get excited. If we have better [economic] growth, then the Fed doesn’t do anything,” he told CNBC’s “Fast Money” on Monday. “If we have worse growth, then numbers are going to come down and then the Fed will eventually cut. The second half will be better, but the first half is going to be really, really sloppy.”

Harvey’s target is just 75 points above Monday’s S&P 500′s close.

“Can we go higher from here? Sure, we can go a little bit higher. But I just don’t think you can go a ton higher,” he said. “People have talked about 5,000. I don’t see how you get to that level.”

In his official 2024 outlook note, Harvey told clients to brace for a “trader’s market” instead of a “buy-and-hold situation.” His early year strategy: Start with a risk-averse stance.

“The VIX [CBOE Volatility Index] is up 13. Every time we’ve gone into a new year with the VIX at 13, we’ve seen spikes. We’ve seen the equity market pull back, and it’s just not a great setup into 2024,” Harvey added.

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Phan Vee Leung
CIO & Founder, TrackRecord