So many things to worry about but…

Thoughts of the Day

Amid last year’s concerns—Ukraine conflict, rising interest rates, US-China tensions, and Israel attacks—the US stock indices, including a 25% surge in S&P500 and 50% in Nasdaq, defied the odds. Now, facing similar and additional worries (Taiwan, houthis attacking ships in the red sea), the market’s resilience may persist if inflation trends toward the 2% target. As we have repeatedly said before, bull markets are formed when markets climb the wall of worries.

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The ECB Monetary Policy Meeting Minutes are slated to be released.

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What Happened Yesterday

Market Movements as of New York Close 17 Jan 24
  • The Australian economy lost -65.1k jobs in December (vs +17.6k expected), a reversal from the +72.6k added to the economy (revised from +61.5k) in November. Unemployment rate remained at 3.9% as expected while the participation rate declined to 66.8% (vs 67.1%) from 67.2%. The AUD fell -0.37% against the USD from 0.6549 to 0.6525 in immediate reaction but has since recovered to levels before the release of the data (0.655 level).
  • The UK CPI showed that prices rose +4% in December (vs +3.8% expected), compared to +3.9% in November. It is the first increase in inflation rate in 10 months. The core inflation rate rose +5.1% (vs +4.9% expected) as it did in November. The GBP rallied +0.41% against the USD from 1.2605 to 1.2656 in immediate reaction as this makes it less likely for the Bank of England to cut interest rates any time soon. 
  • The Euro area inflation rate spiked to +2.9% in December from +2.4% in November as expected. The rise in inflation was due to energy-related base effects. The core inflation rate fell to +3.4% as expected from +3.6% previously. EUR reaction to the data release was muted. 
  • US Retail Sales rose +0.6% Month-on-Month in December (vs +0.4% expected), up from +0.3% in November mainly caused by an increase in sales in automobiles. On an annual basis, US Retail Sales rose +5.6% in December, up from 4% in November (revised from +4.1%.
  • The US Treasury Yield curve inversion widened to 0.24% as the US 2-year bond yield spiked +0.12% to 4.34% while the 10-year yield rose +0.03% to 4.10%. The rise in bond yields were mainly due to the strong Retail Sales data which makes the US Federal Reserve less likely to be in a rush to cut interest rates. 
  • The US stock futures traded lower through the Asian and London trading sessions as weak risk sentiment remained. The S&P 500 futures were down -0.70% on the day before the New York session began.
  • The US stock market opened lower from Tuesday. It then range-traded at lower levels through the New York session. Consequently, the S&P 500 fell -0.56% on the day (high: -0.46%, low: -1.07%), the Dow Jones dipped -0.25% (high: +0.03%, low: -0.61%) while the Nasdaq slipped -0.56% (high: -0.48%, low: -1.60%).
  • The crypto market fell on the day as well due to weakened risk sentiment.
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Headlines & Market Impact

Strong US retail sales underscore economy’s momentum heading into 2024

Notable Snippet: U.S. retail sales rose more than expected in December, boosted by an increase in motor vehicle and online purchases, keeping the economy on solid ground heading into the new year.

The upbeat report from the Commerce Department on Wednesday, which prompted economists to upgrade their economic growth estimates for the fourth quarter, cast further doubt on financial market expectations that the Federal Reserve would start cutting interest rates in March.

It followed news earlier this month of strong employment and wage gains in December as well as a pickup in consumer prices. Fed Governor Christopher Waller on Tuesday described the economy as “doing well,” which he said was giving the U.S. central bank “the flexibility to move carefully and methodically” on monetary policy.

Retail sales rose 0.6% last month after an unrevised 0.3% gain in November, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast retail sales would gain 0.4%. Retail sales are mostly goods and are not adjusted for inflation. Sales increased 5.6% on a year-on-year basis in December.

Sales were likely partially boosted by difficulties adjusting the data for seasonal fluctuations following distortions during the COVID-19 pandemic. In the last couple of years, consumers started their holiday shopping early to avoid empty shelves.

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For many in China, the economy feels like it is in recession

Notable Snippet: Zhang was hoping to start a career in state propaganda after more than 100 unsuccessful job applications in the media industry. With a record 2.6 million people going for 39,600 government jobs amid a youth unemployment crisis, she didn’t get through.

“We were born in the wrong era,” said the 24-year-old graduate from China’s top Renmin University.

“No one cares about their dreams and ambitions anymore in an economic downturn. The endless job-hunting is a torture.”

A crisis of confidence in the economy is deterring consumers from spending and businesses from hiring and investing, in what could become a self-feeding mechanism that erodes China’s long-term economic potential.

China grew 5.2% last year, more than most major economies. But for the unemployed graduates, the property owners who feel poorer as their flats are losing value, and the workers earning less than the year before, the world’s second-largest economy feels like it’s shrinking.

Zhu Tian, economics professor at China Europe International Business School in Shanghai, says the textbook definition of a recession – two consecutive quarters of economic contraction – should not apply to a developing country investing roughly 40% of its output annually, twice the level of the United States.

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Focus sharpens on Fed’s disappearing reverse repo

Notable Snippet: As the amount of cash parked at the Federal Reserve’s overnight reverse repo facility (ON RRP) hurtles towards zero, the Fed’s visibility on the minimum level of bank reserves needed to ensure the financial system functions smoothly also diminishes

Once the banking system gets close to what is considered the ‘lowest comfortable level of reserves’ (LCLOR), the Fed is in murkier territory where credit conditions could suddenly be adversely affected, as happened in late 2019.

The daily RRP is sometimes seen as a gauge of excess reserves in the system and a barometer of how broader liquidity conditions are evolving. If it goes to zero, the Fed may be forced to tread more carefully in reducing its balance sheet.

At the current pace, the RRP balance will likely evaporate completely by the middle of the year. Many market participants and Fed officials see no problem with that, others are wary

The RRP is often considered to be a proxy for overall bank reserves and liquidity in the system, and therefore a guide post for the Fed in terms of how it views the pace of reducing its balance sheet via quantitative tightening.

The RRP balance on Tuesday fell to $583 billion, the lowest since June, 2021. In June last year it exceeded $2 trillion, indicating that around $1.5 trillion of liquidity has been drained from the system in seven months.

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord