The numbers: A closely watched index that measures U.S. manufacturing activity rose by 0.7 percentage point to 47.4 in December, according to the Institute for Supply Management on Wednesday.
Economists surveyed by the Wall Street Journal had forecast the index to rise to 47.2.
Any number below 50 reflects a shrinking economy. Manufacturing has contracted for 14 straight months.
Key details: The key new-orders index fell 1.2 percentage points to 47.1 in December.
Production rose 1.8 percentage points to 50.3 from the prior month. Employment picked up slightly but remained below the 50-percentage-point threshold.
Prices fell 4.7 percentage points to 45.2. That’s the biggest drop since May 2023. Inventories were down 0.5 percentage point to 44.3 in December.
Customer inventories dipped back below 50 last month to 48.1 in December.
Only one industry, primary metals, reported growth in December, while 16 reported contractions.
Layoffs picked up in December, concentrated in the computer and electronics, machinery, and food and beverage sectors.
Big picture: The contraction in manufacturing is the longest since 2000-01, after the dot-com bubble exploded, said Jay Hawkins, senior economist at BMO Capital Markets.
Economists said that depressed capital spending has been the key drag on the factory sector, along with weak global trade. They expect that a sharp drop in long-term interest rates will improve the picture, but the change won’t happen overnight.
What the ISM said: Tim Fiore, chair of the ISM manufacturing survey committee, was relatively upbeat about the data. He said the sector was closing the year in a “really good position” and forecast that the ISM factory index would rise above the 50-percentage-point threshold by March. Fiore said he also expects the inventory number to pick up in coming months.
What economists said: “The survey indicates that conditions in the factory sector remain unusually weak and that output is likely to continue declining for at least a few more months,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics.
A surprise surge in American oil and gas production and exports is helping to keep the world stocked, blunting the impact of widening conflict in the Middle East that has crimped key shipping lanes.
When Iranian-backed Houthi militants began launching missiles and drones at ships crossing the Red Sea near Yemen in October, many feared disruption to the vital shipping lane would drive up energy prices. But oil and gas prices this past month have sunk about 5% and 23%, respectively.
U.S. bond yields fell on Wednesday as investors continued to bet inflation will ease and the Federal Reserve will cut interest rates in 2024, with rates extending their drop in the afternoon after the Treasury Department sold a slug of 5-year Treasury notes.
What’s happening
The yield on the 2-year Treasury BX:TMUBMUSD02Y
fell more than 11 basis points to 4.238%. Yields and debt prices move opposite each other.
The yield on the 10-year Treasury BX:TMUBMUSD10Y
dropped 9.9 basis points to 3.803%.
The yield on the 30-year Treasury BX:TMUBMUSD30Y
declined 8.5 basis points to 3.96%.
What’s driving markets
Benchmark U.S. bond yields extended a drop after market participants absorbed a sale of $58 billion in 5-year Treasury notes BX:TMUBMUSD05Y.
Yields had declined as investors continued to bet that the easing of inflation — down to 3.1% in November — means the Federal Reserve will lower borrowing costs next year.
The auction produced a high yield of 3.801%, down from 4.42% at the last sale of 5-year supply in October. The bid-to-cover ratio — a measure of bids versus the amount on sale — was 2.50, up from 2.46 in the October auction.
Markets, meanwhile, are pricing in an 85.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Jan. 30-31, according to the CME FedWatch tool.
“A moderation in headline and core inflation has created a pathway for central banks to ease off on restrictive policies,” said Stephen Innes, managing partner at SPI Asset Management.
“As inflation subsides, the Federal Reserve sees higher real rates becoming increasingly economically unfavorable, possibly reducing the necessity for policy rates to remain in prohibitive territory,” Innes added.
But the chances of at least a 25 basis point rate cut at the subsequent meeting in March is priced at 84.6%. Indeed, traders reckon that by December 2024, the Fed’s main rate will be at least down to a range of 3.75% to 4.0%.
U.S. stocks closed higher Tuesday, building on a streak of eight straight weekly gains as the final, holiday-shortened week of 2023 got under way.
What happened
On Friday, stocks finished a choppy pre-holiday trading session mostly higher, with the S&P 500, Dow and Nasdaq each scoring an eighth straight weekly gain. The S&P 500 finished 0.9% away from its record close of 4,796.56, set on Jan. 3, 2022.
The median forecasts in this calendar come from surveys of economists conducted by Dow Jones Newswires and The Wall Street Journal.
All statistics in this calendar are in expressed in nominal terms unless labeled “real.” “Real” statistics are inflation-adjusted using the most relevant deflator. “SAAR” means seasonally adjusted annual rate.
Click on the links to read MarketWatch coverage of the data and speeches.
Speculation that the 60-40 portfolio may have outlived its usefulness has been rife on Wall Street after two years of lackluster performance.
But as the yield on the 10-year Treasury note BX:TMUBMUSD10Y
hovers around 4%, some strategists say the case for allocating a healthy portion of one’s portfolio to bonds hasn’t been this compelling in a long time.
And with the Federal Reserve penciling three interest-rate cuts next year, investors who seize the opportunity to buy more bonds at current levels could reap rewards for years to come, as waning inflation helps to normalize the relationship between stocks and bonds, restoring bonds’ status as a helpful portfolio hedge during tumultuous times, market strategists and portfolio managers told MarketWatch.
Add to this is the notion that equity valuations are looking stretched after a stock-market rebound that took many on Wall Street by surprise, and the case for diversification grows even stronger, according to Michael Lebowitz, a portfolio manager at RIA Advisors, who told MarketWatch he has recently increased his allocation to bonds.
“The biggest difference between 2024 and years past is you can earn 4% on a Treasury bond, which isn’t that far off from the projected return in U.S. stocks right now,” Lebowitz said. “We’re adding bonds to our portfolio because we think yields are going to continue to come down over the next three to six months.”
Since modern portfolio theory was first developed in the early 1950s, the 60-40 portfolio has been a staple of financial advisers’ advice to their clients.
The notion that investors should favor diversified portfolios of stocks and bonds is based on a simple principle: bonds’ steady cash flows and tendency to appreciate when stocks are sliding makes them a useful offset for short-term losses in an equity portfolio, helping to mitigate the risks for investors saving for retirement.
However, market performance since the financial crisis has slowly undermined this notion. The bond-buying programs launched by the Fed and other central banks following the 2008 financial crisis caused bond prices to appreciate, while driving yields to rock-bottom levels, muting total returns relative to stocks.
At the same time, the flood of easy money helped drive a decadelong equity bull market that began in 2009 and didn’t end until the advent of COVID-19 in early 2020, FactSet data show.
More recently, bonds failed to offset losses in stocks in 2022. And in 2023, U.S. equity benchmarks such as the S&P 500 SPX
have still outperformed U.S. bond-market benchmarks, despite bonds offering their most attractive yields in years, according to Dow Jones Market Data.
The Bloomberg U.S. Aggregate Total Return Index AGG
has returned 4.6% year-to-date, according to Dow Jones data, compared with a more than 25% return for the S&P 500 when dividends are included.
But this could be about to change, according to analysts at Deutsche Bank. The team found that, going back decades, the relationship between stocks and bonds has tended to normalize once inflation has slowed to an annual rate of 3% based on the CPI Index.
DEUTSCHE BANK
The CPI Index for November had core inflation running at 4% year over year, a level it has been stuck at for the past several months. The Fed’s projections have inflation continuing to wane in 2024.
Staff economists at the central bank expect the core PCE Price Index, which the Fed prefers to the CPI gauge, to slow to 2.4% by the end of next year. If that comes to pass, investors should see the inverse relationship between stocks and bonds return, according to Lebowitz and others.
A window of opportunity
The dismal performance of 60-40 portfolios over the past two years has inspired a wave of Wall Street think pieces questioning whether it still makes sense for contemporary investors.
A team of academics led by Aizhan Anarkulova at Emory University in November presented findings showing that over a lifetime, investors would have reaped higher returns via a portfolio consisting of 100% exposure to stocks, split between foreign and domestic markets.
But fixed-income strategists at Deutsche and Goldman Sachs Group, as well as others on Wall Street, say investors wouldn’t be well-served by excluding bonds from their portfolio, particularly with yields at current levels.
Rob Haworth, senior investment strategy director at U.S. Bank’s wealth-management business, says investors now have an opportunity to lock in attractive returns for decades to come, ensuring that the bonds in their portfolios will, at the very least, deliver a steady stream of income that would reduce any losses in stocks or declines in bond prices.
There is, however, one catch: with the Fed expected to cut interest rates, that window could quickly close.
“The problem is, for investors in cash, the Fed’s just told you that is not going to last. I think that means it is time to start thinking about your long-term plan,” Haworth said.
U.S. stock index futures were hovering around their highs of the year and just shy of record levels as investors continued to revel in an expected loosening of monetary policy by the Federal Reserve in 2024 amid a ‘soft landing’ for the U.S. economy.
How are stock-index futures trading
S&P 500 futures ES00, +0.05%
rose 3 points, or less than 0.1% to 4796
Dow Jones Industrial Average futures YM00, +0.01%
added 10 points, or less than 0.1% to 37688
Nasdaq 100 futures NQ00, +0.02%
were unchanged at 16940
On Monday, the Dow Jones Industrial Average DJIA
rose 1 points, or 0%, to 37306, the S&P 500 SPX
increased 21 points, or 0.45%, to 4741, and the Nasdaq Composite COMP
gained 91 points, or 0.62%, to 14905.
What’s driving markets
The S&P 500 was set to open Tuesday’s session only about 1% below its record close as traders remained energized by the prospect of the Federal Reserve starting to cut interest rates by the spring of next year.
Some Fed officials in recent days pushed back against the market’s hopes for lower borrowing costs as early as March, but equity investors seem to have shrugged off those comments, for now.
Meanwhile, the Bank of Japan on Tuesday reminded traders that an important spigot of cheap money still remains open. The BOJ left its main interest rate at minus 0.1%, and in the accompanying news conference, Governor Kazuo Ueda provided little evidence he was minded to exit the central bank’s ultra-loose monetary policy anytime soon, despite inflation running above its 2% target for 19 consecutive months.
The Japanese yen USDJPY, +1.32%
fell 1.2% and the Nikkei 225 stock index JP:NIK
rose 1.4% as 10-year government bond yields BX:TMBMKJP-10Y
fell 3.6 basis points to 0.634%, the lowest in nearly four months.
“Whenever central banks take positions that the market thinks are unsustainable, it’s always the currencies that play the role of the canary in the coal mine. No surprise then to see the Yen weakening by around 1% against every major currency overnight as investors vote with their feet,” said Steve Clayton, head of equity funds at Hargreaves Lansdown.
Traders were also warily eyeing the oil market, after benchmark Brent crude BRN00, +0.06%
jumped on Monday following BP’s statement it was halting shipments through the Red Sea, and thus the Suez Canal, because of attack’s by the Houthi in Yemen.
Many of the world’s biggest shipping companies have said they also will steer clear of the region, prompting concerns about rising costs that may build inflationary pressures.
“An extended period of disruption in global trade ways should not only sustain energy prices, but also put a renewed pressure on global supply chains and shipping prices,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“The latter is a threat to inflation. Remember, the pandemic-related supply chain disruptions were the major reason that sent inflation to almost 10% in the U.S.,” Ozkardeskaya added.
However, there was little evidence early Tuesday that investors were overly concerned by that narrative, with 10-year U.S. Treasury yields BX:TMUBMUSD10Y
dipping 2.7 basis points to 3.912%.
U.S. economic updates set for release on Tuesday include November housing starts and building permits at 8:30 a.m. Eastern.
Atlanta Fed President Raphael Bostic is due to speak at 12:30 p.m.
Wall Street seems to agree that U.S. stocks will climb to fresh record highs in 2024. But the most important question for investors may still be the direction and speed of interest-rate moves.
Rate-sensitive groups of stocks with lackluster fundamentals, such as financials, utilities, staples, “may be able to outperform, at least early in the year,” if one expects interest rates “to come down quickly and permanently,” said Nicholas Colas, co-founder of DataTrek Research.
But if “one expects a bumpier ride on the rate front,” then stronger groups, like technology and tech-adjacent sectors “should do better,” Colas said in a Monday client note.
The S&P 500’s utilities, consumer staples and energy sectors have been the worst performing parts of the large-cap benchmark index so far in 2023, according to FactSet data.
With an over 10% year-to-date decline, the S&P 500’s utilities sector XX:SP500.55
has significantly underperformed the broader index’s SPX
23.6% advance.
The S&P 500’s best performing information technology sector XX:SP500.45
was up 56.5% for the same period. But its consumer staples XX:SP500.30
and energy XX:SP500.10
sectors have slumped by 2.6% and 4.1% so far this year, respectively, according to FactSet data.
Utilities and consumer staples are usually considered defensive investment sectors, or “bond proxies,” because they can help investors minimize stock-market losses in any economic downturn. Companies in these sectors usually provide electricity, water and gas, or they sell products and services that consumers regularly purchase, regardless of economic conditions.
However, utilities and consumer staples stocks were under a lot of pressure this year. A relentless climb in U.S. Treasury yields in October made defensive stocks less attractive compared with government-issued bonds, or money-market funds offering 5%, especially as the economy remained strong, pushing recession expectations out further.
Colas expects “weaker groups” to catch a stronger tailwind if rates continue to decline.
The S&P 500’s utilities and consumer staples sectors rose 0.9% and 1.6% last week, respectively, compared with the information technology sector’s 2.5% advance and communication services sector’s XX:SP500.50
0.1% decline, according to FactSet data.
Earnings growth expectations for each S&P 500 sector in 2024 are indicated below. Sectors to the left of the dotted black line are expected to show better bottom-line results than the S&P 500 as a whole, while those to the right are expected to show weaker earnings growth.
SOURCE: FACTSET, DATATREK RESEARCH
Wall Street expects next year to see 11.5% growth in S&P 500 earnings-per-share (EPS), to $244, and 5.5% revenue growth, according to FactSet data.
However, there is a wide dispersion across S&P 500 sectors. The range goes from 2% revenue and 3% earnings growth for the energy sector, to 9% revenue and 17% earnings growth for the information technology sector, according to data compiled by DataTrek Research.
“Playing fundamentally weaker sectors therefore assumes even more good news on the rate front,” Colas said, adding that it still is riskier than sticking with “tried and true groups” like technology.
Moreover, sectors such as utilities, financials and consumer staples are not expected to show 10% earnings growth next year, while health care and big tech-dominated groups like communication services, technology and consumer discretionary, are expected to show much better than average revenue and earnings growth in 2024, said Colas, citing FactSet data.
U.S. stocks closed higher on Monday, with the Dow Jones Industrial Average DJIA
building on its all-time high set last week. The S&P 500 gained 0.5% and the Dow Industrials closed fractionally higher. The Nasdaq Composite COMP
finished up 0.6%, according to FactSet data.
Yields on 3-month BX:TMUBMUSD03M
and 6-month BX:TMUBMUSD06M
Treasury bills have been seeing yields north of 5% since March when Silicon Valley Bank’s collapse ignited fears of a broader instability in the U.S. banking sector from rapid-fire Fed rate hikes.
Six months later, the Fed, in its final meeting of the year, opted to keep its policy rate unchanged at 5.25% to 5.5%, a 22-year high, but Powell also finally signaled that enough was likely enough, and that a policy pivot to interest rate cuts was likely next year.
Importantly, the central bank chair also said he doesn’t want to make the mistake of keeping borrowing costs too high for too long. Powell’s comments helped lift the Dow Jones Industrial Average DJIA
above 37,000 for the first time ever on Wednesday, while the blue-chip index on Friday scored a third record close in a row.
“People were really shocked by Powell’s comments,” said Robert Tipp, chief investment strategist, at PGIM Fixed Income. Rather than dampen rate-cut exuberance building in markets, Powell instead opened the door to rate cuts by midyear, he said.
“Eventually, you end up with a lower fed-funds rate,” Tipp said in an interview. The risk is that cuts come suddenly, and can erase 5% yields on T-bills, money-market funds and other “cash-like” investments in the blink of an eye.
Swift pace of Fed cuts
When the Fed cut rates in the past 30 years it has been swift about it, often bringing them down quickly.
Fed rate-cutting cycles since the ’90s trace the sharp pullback also seen in 3-month T-bill rates, as shown below. They fell to about 1% from 6.5% after the early 2000 dot-com stock bust. They also dropped to almost zero from 5% in the teeth of the global financial crisis in 2008, and raced back down to a bottom during the COVID crisis in 2020.
Rates on 3-month Treasury bills dropped suddenly in past Fed rate-cutting cycles
FRED data
“I don’t think we are moving, in any way, back to a zero interest-rate world,” said Tim Horan, chief investment officer fixed income at Chilton Trust. “We are going to still be in a world where real interest rates matter.”
Burt Horan also said the market has reacted to Powell’s pivot signal by “partying on,” pointing to stocks that were back to record territory and benchmark 10-year Treasury yield’s BX:TMUBMUSD10Y
that has dropped from a 5% peak in October to 3.927% Friday, the lowest yield in about five months.
“The question now, in my mind,” Horan said, is how does the Fed orchestrate a pivot to rate cuts if financial conditions continue to loosen meanwhile.
“When they begin, the are going to continue with rate cuts,” said Horan, a former Fed staffer. With that, he expects the Fed to remain very cautious before pulling the trigger on the first cut of the cycle.
“What we are witnessing,” he said, “is a repositioning for that.”
Pivoting on the pivot
The most recent data for money-market funds shows a shift, even if temporary, out of “cash-like” assets.
The rush into money-market funds, which continued to attract record levels of assets this year after the failure of Silicon Valley Bank, fell in the past week by about $11.6 billion to roughly $5.9 trillion through Dec. 13, according to the Investment Company Institute.
Investors also pulled about $2.6 billion out of short and intermediate government and Treasury fixed income exchange-traded funds in the past week, according to the latest LSEG Lipper data.
Tipp at PGIM Fixed Income said he expects to see another “ping pong” year in long-term yields, akin to the volatility of 2023, with the 10-year yield likely to hinge on economic data, and what it means for the Fed as it works on the last leg of getting inflation down to its 2% annual target.
“The big driver in bonds is going to be the yield,” Tipp said. “If you are extending duration in bonds, you have a lot more assurance of earning an income stream over people who stay in cash.”
Molly McGown, U.S. rates strategist at TD Securities, said that economic data will continue to be a driving force in signaling if the Fed’s first rate cut of this cycle happens sooner or later.
With that backdrop, she expects next Friday’s reading of the personal-consumption expenditures price index, or PCE, for November to be a focus for markets, especially with Wall Street likely to be more sparsely staffed in the final week before the Christmas holiday.
The PCE is the Fed’s preferred inflation gauge, and it eased to a 3% annual rate in October from 3.4% a month before, but still sits above the Fed’s 2% annual target.
“Our view is that the Fed will hold rates at these levels in first half of 2024, before starting cutting rates in second half and 2025,” said Sid Vaidya, U.S. Wealth Chief Investment Strategist at TD Wealth.
U.S. housing data due on Monday, Tuesday and Wednesday of next week also will be a focus for investors, particularly with 30-year fixed mortgage rate falling below 7% for the first time since August.
The major U.S. stock indexes logged a seventh straight week of gains. The Dow advanced 2.9% for the week, while the S&P 500 SPX
gained 2.5%, ending 1.6% away from its Jan. 3, 2022 record close, according to Dow Jones Market Data.
The Nasdaq Composite Index COMP
advanced 2.9% for the week and the small-cap Russell 2000 index RUT
outperformed, gaining 5.6% for the week.
U.S. stocks closed mostly higher Friday, with major U.S. equity indexes booking a seventh straight week in the green in the wake of the Federal Reserve’s policy meeting.
The S&P 500 saw its longest weekly winning streak since November 2017, according to Dow Jones Market Data.
How stock indexes traded
The Dow Jones Industrial Average DJIA
rose 56.81 points, or 0.2%, to close at a record 37,305.16.
The S&P 500 SPX
was about flat, slipping less than 0.1%, to finish at 4,719.19
The Nasdaq Composite COMP
gained 52.36 points, or 0.4%, to end at 14,813.92.
What drove markets
U.S. stocks finished mostly higher Friday, with the Dow Jones Industrial Average logging a third straight record close.
The “more optimistic tone of markets over the last several weeks has been justified,” Russell Price, chief economist at Ameriprise Financial, said in a Friday phone call. It’s “reasonable” for the stock market to be pricing in rate cuts by the Federal Reserve in 2024, with the recent drop in 10-year Treasury yields helping to lift equities, he said.
Price said he’s expecting the Fed may begin cutting rates in June and the U.S. economy will slow to a “sustainable” pace of growth in 2024. In his view, real gross domestic product may rise 1.8% to 1.9% next year.
Nearly all of the S&P 500’s 11 sectors finished with gains this week, while small-capitalization stocks saw a stronger rally than large-cap equities.
The small-cap Russell 2000 index RUT
posted a weekly gain of around 5.6%, FactSet data show. The S&P 500 rose around 2.5% this week.
At his press conference on Wednesday, Fed Chair Jerome Powell gave “a nod” that inflation was on the right path and lower rates were on the horizon next year, according to Price. But when it comes to the federal-funds futures, Price said that traders appear to have gotten “too far ahead” in their bets on rate cuts.
Fed-funds futures pointed to the central bank starting to reduce its benchmark rate as soon as March, according to the CME FedWatch Tool.
Stocks hit a speed bump in Friday’s trading session after New York Federal Reserve Bank President John Williams pushed back against those rate expectations during an interview with CNBC. “We aren’t really talking about cutting interest rates right now,” Williams said.
Inflation, as measured by the consumer-price index, slowed to a year-over-year rate of 3.1% in November, down significantly from last year’s peak of 9.1% in June. But “it’s too early to call ‘mission accomplished’ just yet” for the Fed’s goal of bringing inflation down to its 2% target, said Price.
Still, Powell was explicit during his press conference about not needing a recession to cut rates, according to Nationwide’s chief of investment research Mark Hackett. “That was code for a soft landing,” Hackett said by phone Friday.
On the economic news front Friday, the New York Fed’s Empire State manufacturing survey showed U.S. manufacturing activity continued to struggle as the gauge tumbled to a four-month low. Flash services and manufacturing PMIs from S&P affirmed that manufacturing activity remained weak, while services activity reached a five-month high.
Meanwhile, the yield on the 10-year Treasury note BX:TMUBMUSD10Y
fell 31.7 basis points this week to 3.927%, the largest weekly drop since November 2022, according to Dow Jones Market Data.
The S&P 500 ended Friday about flat, but just 1.6% below its record close, reached Jan. 3, 2022.
“The momentum in the market is undeniably incredibly strong right now,” said Nationwide’s Hackett, though on Friday investors appeared to be taking “a natural break.”
Companies in focus
Palantir Technologies Inc. shares PLTR, -0.05%
slipped about 0.1% on Friday after the company announced an extension to a U.S. Army contract.
Steel Dynamics Inc.’s shares STLD, +4.52%
jumped 4.5% after the company reported earnings, making it one of the S&P 500’s best performers in Friday’s trading session.
Costco Wholesale Corp. shares COST, +4.45%
climbed around 4.5% after reporting fiscal first-quarter earnings and revenue largely in line with expectations following the market’s close on Thursday, and announced a special dividend of $15 a share.
JD.com JD, +4.46%
gained 4.5% as fresh stimulus out of China helped boost shares of companies based in the world’s second-largest economy. Alibaba Group Holding Ltd.’s stock BABA, +2.76%
rose 2.8%.
Oil futures fell on Friday, but finished off the session’s lows to eke out a gain for the week — the first for U.S. and global benchmark crude prices in eight weeks.
Attacks on ships traveling through the Red Sea, blamed on Yemen’s Houthi rebels, raised the potential for disruptions to the transport of oil and other goods, providing some support for prices.
Oil saw larger declines early Friday after a Federal Reserve official walked back dovish comments made earlier this week by the Fed Chair Jerome Powell, helping to strengthen the U.S. dollar.
Price action
West Texas Intermediate crude for January CL00, +0.49%
CLF24, +0.49%
declined by 15 cents, or 0.2%, to settle at $71.43 a barrel on the New York Mercantile Exchange, with prices ending 0.3% higher for the week, according to Dow Jones Market Data.
BRNG24, +0.52%,
the global benchmark, fell 6 cents, or nearly 0.1%, to $76.55 a barrel on ICE Futures Europe, settling 0.9% higher for the week.
January gasoline RBF24, -0.16%
added 0.9% to $2.14 a gallon, up almost 4.3% for the week, while January heating oil HOF24, +0.20%
climbed 1.1% to $2.62 a gallon on Nymex, marking a weekly rise of 1.5%.
Natural gas for January delivery NGF24, -0.88%
gained 4.1% to $2.49 per million British thermal units, but still logged a weekly loss of 3.5%.
The Red Sea is “one of the hot pockets of seaborne crude flows,” accounting for approximately 10% of global volume, said Manish Raj, managing director at Velandera Energy Partners. “Although the attackers lack sophistication … shipping crews are even less sophisticated, making them easy targets.”
A potential blockage of the Red Sea route would be “chaotic indeed, but not nearly as detrimental as blockage of [the] Strait of Hormuz near Iran, for which there is no viable alternative,” Raj said.
For now, there is concern over higher insurance costs for these ships, said Phil Flynn, senior market analyst at the Price Futures Group.
“With ships in the Red Sea continuing to be at high risk, ‘it won’t take that much for the market’ to see oil prices spike if an oil tanker should be hit.”
— Phil Flynn, Price Futures Group
Obviously, the risk to oil supply is large, although “so far, most of the attacks have been on cargo ships and not oil-related ships,” Flynn told MarketWatch.
However, as ships in the Red Sea continue to be at high risk, “it won’t take that much for the market” to see oil prices spike if an oil tanker is hit, Flynn said.
For the week, both U.S. and global benchmark crude prices posted gains.
“The combination of lower U.S. inventories, stronger economic data, and improved OPEC compliance [with production cuts] for the month of November were the highlights of the week,” said Peter McNally, global head of sector analysts at Third Bridge.
“However, there are ongoing seasonal challenges that forced OPEC to sustain production cuts through the first quarter of 2024, so it remains to be seen if they have done enough to prevent inventories from continuing their upward trend,” he said.
Oil had been trading lower early Friday after New York Federal Reserve President John Williams told CNBC that it is “premature” to discuss whether it is time to cut interest rates. “We aren’t really talking about cutting interest rates right now,” Williams said.
That ran contrary to Powell’s comments Wednesday that Fed officials were starting to discuss when to cut rates.
After the euphoria in the U.S. stock market over the Powell “pivot party” on Wednesday, we got a “wake-up call” from Williams when he pushed back on market expectations for a March rate cut, Michael Hewson, chief market analyst at CMC Markets UK, said in market commentary.
Germany’s central bank lowered its growth forecasts for the country’s economy for the next two years due to lower global demand, according to a twice-yearly report published Friday.
The Bundesbank now expects gross domestic product growth at 0.4% and 1.2% for 2024 and 2025, down from 1.2% and 1.3%, respectively, under previous forecasts made in June.
The bank penciled in for GDP to fall 0.1% in 2023 as a whole, and also predicts growth at 1.3% in 2026 in the fresh forecasts.
Weak foreign demand is the main drag on the country’s key industrial sector, while restrained private consumption and higher financing costs are dampening investment, it said.
However, the economy will benefit from a robust labor market, strong wage growth and falling inflation that should help bring about a recovery in household spending, it added.
“From the beginning of 2024, the German economy is likely to return to an expansion path and gradually pick up speed,” Bundesbank President Joachim Nagel said.
This comes as inflation is set to fall faster than previously expected. The Bundesbank sees harmonized annual inflation–based on European Union metrics–at 2.7% and 2.5% in 2024 and 2025, respectively, down from the 3.1% and 2.7% it predicted in June.
“Monetary policy tightening is increasingly yielding results,” Nagel said.
However, inflation is still set to be 2.2% in 2026, above the 2% target of the European Central Bank, which has recently raised rates at an unprecedented speed. The ECB held rates at a record high at its meeting this week.
Meanwhile, the latest turmoil related to the German government’s budget–which for 2024 was only agreed to this week–won’t significantly alter the fiscal and macroeconomic outlook, according to the Bundesbank.
However, there is still uncertainty regarding future fiscal policy, in particular for 2025 and in terms of the country’s transition to cleaner energy, it said.
Federal Reserve Chairman Jerome Powell startled economists with a press conference Wednesday that was viewed as much more dovish than expected.
It was “12 doves a-leaping,” said Michael Feroli, U.S. economist at JPMorgan Chase.
“The Fed can’t believe its luck. The data is going their way,” said Krishna Guha, vice chairman of Evercore ISI.
The first dovish signals came in the Fed’s statement and economic forecasts at 2 p.m. Eastern. First, the Fed penciled in three rate cuts in 2024 instead of two that were projected in September. The Fed also softened its tightening bias by saying they were mulling the need for “any” more hikes.
Then, half an hour later at his press conference, “Chair Powell did nothing to undo the impression of those signals,” said Feroli, in a note to clients. Powell said Fed officials were starting to discuss when to cut rates.
“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at out meeting today,” Powell said. Fed officials think the Fed is “likely at or near the peak rate for this cycle.”
While Powell didn’t take rate cuts “off the table,” they are “collecting dust,” said Michael Gregory, deputy chief economist at BMO Capital Markets.
Markets reacted with the 10-year Treasury yield BX:TMUBMUSD10Y
falling to 4.025%.
Traders in derivative markets now see an 80% chance of the first rate cut in March, and now see five quarter-point cuts next year.
Matt Luzzetti, chief U.S. economist at Deutsche Bank, said the main thing learned from Wednesday’s press conference was that Fed Gov. Chris Waller’s dovish comments a few weeks ago were a reflection of the mainstream view at the central bank, rather than a dovish outsider.
Some economists think that March is too soon for a rate cut.
“We still judge rate cuts will commence later rather than sooner, still by the end of the third quarter of 2024,” Gregory of BMO Capital Markets said.
Feroli said he now sees the first rate cut in June, instead of his prior forecast of July, and predicted that the Fed will cut five times by the end of 2024.
Luzzetti of Deutsche Bank sees six rate cuts next year, but not beginning until June as the economy falls into a mild recession.
The Fed doesn’t forecast a recession. Its rate cuts are purely a story of weakening inflation. If there is a recession, the Fed will cut very fast, Luzzetti said.
Diane Swonk, chief economist at KPMG, said the odds of a recession are lower now that the Fed has signaled it will actively take steps to try to avoid one.
The Fed wants the economy to cruise at a lower altitude, and no longer wants a landing, Swonk said in an interview.
That is a 180-degree turn from Powell’s speech in Jackson Hole, Wyo., in the summer of 2022 when he spoke for less than 10 minutes but warned of “pain” and the unfortunate costs of fighting inflation. That speech, “a bucket of ice water,” Swonk said, sent the stock market reeling at the time.
A group of 51 stocks in the benchmark equity index swept to record finishes on Tuesday, the most since April 20, 2022, according to a tally from Dow Jones Market Data.
Equities have been in a year-end rally mode, driven higher by tumbling benchmark yields that finance much of the U.S. economy and expectations of coming interest-rate cuts.
The 10-year Treasury rate BX:TMUBMUSD10Y
fell to 4.2% on Tuesday from a high of about 5% in October.
The Dow Jones Industrial Average DJIA
on Tuesday ended at its third-highest level on record, while the S&P 500 index SPX
and Nasdaq Composite Index COMP
added to a string of new closing highs for 2023. The Dow finished 0.6% away from its record close logged almost two years ago, while the S&P 500 was only 3.2% below its close from the same period, according to Dow Jones Market Data.
The push higher for stocks followed inflation data for November that showed price pressures continued to ease from peak levels, but still were above the Fed’s 2% annual target.
The consumer-price index pegged the annual rate of inflation at 3.1%, down from 3.2% in October, with the “last mile” of inflation expected to be the hardest part to tame.
Investors now will be focused on Wednesday’s Federal Reserve decision. Short-term interest rates are expected to remain unchanged at a 22-year high, but the central bank is expected to update its “dot plot” forecast of rates over a longer time horizon.
“Although the market will focus on the timing of rate cuts, we suspect Chair Powell will be keen to strike notes of caution to avoid financial conditions easing too much further to ensure the Fed continues to see encouraging progress on inflation,” said Emin Hajiyev, senior economist at Insight Investment, in emailed comments.
The rally lifting U.S. stocks to fresh 2023 highs in the year’s home stretch could be at risk if the Federal Reserve on Wednesday crushes expectations for interest-rate cuts in 2024.
U.S. central bankers and investors haven’t exactly been seeing eye-to-eye about when the Fed will start easing its monetary policy, according to Melissa Brown, senior principal of applied research at Axioma.
Traders also have been flip-flopping on their forecasts for rate cuts over the past few months, based on fed-funds futures data.
Oxford Economics/Bloomberg
Given the whipsaw of recent volatility, it isn’t hard to imagine a jittery market backdrop as investors wait to hear from Fed Chairman Jerome Powell on Wednesday, even though the central bank isn’t expected to change its range for short-term interest rates. Since July, the Fed funds rate rate has been at a 22-year high in a 5.25% to 5.5% range.
U.S. stocks advanced this year after a bruising 2022, adding big gains in November, as benchmark 10-year Treasury yields BX:TMUBMUSD10Y
tumbled from a 16-year high of 5%. The Dow Jones Industrial Average DJIA
closed on Friday only 1.5% away from its record close nearly two years ago. The S&P 500 index SPX
booked its highest finish since March 2022, according to Dow Jones Market Data.
“I don’t see any report on the horizon that would really make them [the Fed] change their stance on where we are on monetary policy,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth. It is mostly the expectation of Fed rate cuts next year that have supported stock and bond markets rallies recently, he said.
The Dow Jones closed 9.4% higher on the year through Friday, the S&P 500 was up 19.9% and the Nasdaq Composite advanced 37.6% for the same period, according to FactSet data.
“We have been a little skeptical of the market’s excitement over rate cuts early next year,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.
It takes a gradual process for the Fed to move away from its monetary policy tightening, Clissold told MarketWatch. The Fed is likely to pivot its tone from being very hawkish to neutral, remove the tightening bias, and then talk about rate cuts, noted Clissold.
The bond market on Friday already was again flashing signs of a potential rethink by investors about the path of interest rates in 2024.
HYG,
often a canary in the coal mine for markets, hit pause on a rally that started in late October as benchmark borrowing costs fell, even though the sector has benefited from big inflows of funds in recent weeks.
Treasury yields for 10-year and 30-year BX:TMUBMUSD30Y
bonds also shot higher Friday, echoing volatility that took hold in mid-October.
Mike Sanders, head of fixed income at Madison Investments, has been similarly cautious. “I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” Sanders said. It is more likely that the Fed will start cutting rates in the second half of next year, he said.
“I think the biggest thing is that the continued strength in the labor market continues to make the services inflation stickier,” Sanders said. “Right now we just don’t see the weakness that we need to get that down.”
Friday’s U.S. employment report adds to his concerns. About 199,000 new jobs were created in November, the government said Friday. Economists polled by the Wall Street Journal had forecast 190,000 jobs. The report also showed rising wages and a retreating unemployment rate to a four-month low of 3.7% from 3.9%.
The U.S. central bank will likely “try their best to push back on the narrative of cuts coming very soon,” Sanders said. That could be accomplished in its updated “dot plot” interest rate forecast, also due Wednesday, which will provide the Fed’s latest thinking on the likely path of monetary policy. The Fed’s update in September surprised some in the market as it bolstered the central bank’s stance of higher rates for longer.
There’s still a chance that inflation will reaccelerate, Sanders said. “The Fed is worried about the inflation side more than anything else. For them to take the foot off the brake sooner, it just doesn’t do them any good.”
Ahead of the Fed decision, an inflation update is due Tuesday in the November consumer-price index, while the producer-price index is due Wednesday.
Still, seasonality factors could aid the stock market in December. The Dow Jones Industrial Average in December rises about 70% of the time, regardless of whether it is in a bull or bear market, according to historical data.
“The overall market outlook remains constructive,” said Ned Davis’s Clissold. “A soft landing scenario could support the bull market continuing.”
Last week the Dow eked out a gain of less than 0.1%, the S&P 500 edged up 0.2% and the Nasdaq rose 0.7%. All three major indexes went up for a sixth straight week, with the Dow logging its longest weekly winning streak since February 2019, according to Dow Jones Market Data.
U.S. stocks closed higher on Friday, shaking off earlier weakness after a strong monthly jobs report, to clinch a sixth straight week in a row of gains. The Dow Jones Industrial Average DJIA, +0.36%
advanced about 130 points, or 0.4%, to end near 36,247, according to preliminary FactSet data. The S&P 500 index gained 0.4% Friday and the Nasdaq Composite finished 0.5% higher. A string of weekly gains propelled the S&P 500 index SPX, +0.41%
to a fresh 2023 closing high and left the Dow about 1.4% away from its record close set nearly two years ago, according to Dow Jones Market Data. Equities have benefitted from a risk-on tone going into year end, which has been driven by falling 10-year Treasury yields TMUBMUSD10Y, 4.230%
and optimism around the Federal Reserve potentially cutting interest rates in the year ahead. That hinges on if inflation continues to ease. November’s robust jobs report served as a reminder Friday of the tough path of the “last mile” in getting inflation down to the Fed’s 2% annual target. As part of this, the 10-year Treasury yield jumped about 11.5 basis points Friday to 4.244%, but still was about 74 basis points lower than its October high. For the week, the Dow was only fractionally higher, the S&P 500 gained 0.2% and the Nasdaq climbed 0.7%.
After the U.S. unemployment rate climbed to 3.9% in October, stoking fears that the labor market might finally be starting to crack under the weight of the Federal Reserve’s interest-rate hikes, economic data released Friday showed that unemployment retreated to 3.7% in November.
That means the Sahm rule, an indicator devised to sniff out a recession long before one is officially declared, is now even further from triggering, after nearly brushing up against the threshold last month.
And according to the rule’s creator, former Federal Reserve economist Claudia Sahm, perhaps it won’t trigger, at least not during this cycle.
“I am more optimistic today that it doesn’t trigger,” Sahm told MarketWatch during a phone interview Friday.
What’s the Sahm rule, and why should we care about it?
Wall Street and social media were abuzz with talk of the Sahm rule last month as the rising unemployment rate sparked a debate about whether a recession had begun.
The increase brought the Sahm rule indicator to 0.30, according to data available on a Federal Reserve branch website, bringing it closer to triggering than at any time during the past two years. It also sparked a brisk conversation among professional economists and amateur market watchers about what the Sahm rule is, how it works and why investors should care about it.
After Sahm declared that the rule hadn’t triggered, some on social media accused her of misrepresenting her own rule, said the economist, who now runs her own consulting business.
She was surprised by this, she told MarketWatch, since she thought the rule’s simplicity was one of its most important features.
It was initially devised with lawmakers in mind, intended to become an automatic mechanism to send out stimulus checks more quickly as a recession begins, thus helping to shield workers from some of the worst financial consequences.
But the debate has helped her realize that perhaps the rule’s dynamics aren’t clearly understood by all.
To try to remedy this, she published a step-by-step guide explaining how the Sahm rule is calculated, or at least how Sahm and the Fed calculate it. Economists are free to devise their own variations on the rule. Here are some key points:
The Sahm rule uses the three-month average of the monthly unemployment rate, instead of taking the latest rate in isolation.
The current average is then compared with the lowest three-month average from the past year. Right now, that stands at around 3.5, Sahm said.
The 12-month low is subtracted from the current three-month average, and if the difference is 0.5 percentage point or greater, it means the rule has triggered. The rule is based on history and it has a strong precedent, meaning that almost every time unemployment has risen past this threshold, a recession has ensued.
The snowball effect
The logic undergirding the rule is pretty straightforward, Sahm said: The rule is grounded in the notion, supported by historical data, that once employment starts to rise, it often snowballs.
Typically it increases by anywhere between 4 and 6 percentage points during a recession, Sahm said.
But just because the rule has held in the past doesn’t mean it always will. Sahm has previously said that she wouldn’t be surprised if the rule were to break because of pandemic-related distortions in the global economy.
She affirmed on Friday that she still believes this to be the case, although she doubts the rule will trigger this cycle.
That is largely because, as Sahm sees it, the rise in the unemployment rate has been driven not only by slowing job creation, but by workers returning to the workforce, a sign that supply-and-demand dynamics in the U.S. labor market are coming back into balance, and that maybe employers won’t need to be as precious about hiring in the future.
“If [the rebalancing] happens fast enough, then we won’t trigger. But if it slows down, then maybe we’ll trigger, but we’ll likely see unemployment move sideways before coming back down,” Sahm said.
Labor Department data showed the U.S. economy added 199,000 jobs in November, surpassing economists’ expectations for 190,000 new jobs. The number was also higher than the 150,000 created during the previous month.
