Welcome to a sloppy start for markets as we kick off the first week of the year. The S&P 500 posted its first weekly loss in nine weeks, and the bond market gave back some of its recent gains, too, as yields rose across the curve. Perhaps the sell-off in traditional assets was caused by tax-related selling in the new (tax) year for US investors, or perhaps it was a realisation that markets have simply come too far, too fast. Certainly, the heady valuations in stocks and the 100bps drop in intermediate and long-term UST yields since mid-October were factoring in a lot (i.e. five or six) Fed Funds rate reductions in 2024, which some investors believe could start as early as March. However, the “good news is bad news” narrative poured cold water on these expectations courtesy of a better-than-expected December US jobs report which was released Friday morning before the US open (here). More jobs were added than expected in December, and unemployment – expected to increase – held steady at 3.7%. The initial reaction was that the on-going strength in the US economy would delay easing by the Fed, causing bond yields to increase and stock futures to sell-off. It’s strange to me how good economic news can rattle equity investors. However, equity investors seemed to rethink this even before the market opened, leading to a volatile end-of week session in which we were down-up-down-up-down-up in a single day, with the S&P 500 finally registering a small gain for the final day of the first week of 2024. Bonds were also volatile, but ended the day lower (yields higher).
Equity markets elsewhere fared little better, with all of the indices EMC tracks down on the week. China in particular continued its slide. Try as it may, the Chinese government cannot see to find the right cocktail of stimulus measures, regulatory measures, and rhetoric to soothe investors, as they continue to bail out of stocks in the world’s second largest economy.
It is also worth pointing out the steady deterioration in corporate bond credit spreads, which occurred across the credit spectrum this week but was most pronounced in high yield. The US high yield index widened 30bps WoW, with the behaviour within the non-investment grade spectrum as expected – the weaker the rating, the more severe the spread widening. The CCC end of the curve widened 52bps WoW, backing up to 9.54%. Before you get too worked up, spreads have been much wider in the recent past, and this might just reflect an onslaught of new corporate bond issuance to kick-off the new year. However, it also might signal growing concerns about the US (and global) economy. Let’s see where we go from here.
In other markets, most currencies – including the Yen – lost ground to the US Dollar this week, as investors continue to dither other when the Fed will start to ease. Putting Japan aside as a special case, it’s hard to imagine a scenario based on economic outlook alone for the US Dollar to weaken. And although contrarian I suppose, I continue to scratch my head as to why the Fed would ease before the ECB or Bank of England, given that the US economy is continuing to chug along, certainly much more resilient than the economies of most other developed market countries. My bet would be on Dollar strength vis-à-vis Sterling and the Euro, with the Yen depending solely on the Bank of Japan’s next monetary steps.
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets