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HomeUncategorizedCentral Bank Watch: Week in Review as Regulators Discuss Potential Rate Cuts

Central Bank Watch: Week in Review as Regulators Discuss Potential Rate Cuts

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US Market weekly recap

Equities Recap:

  • Narrow advance in U.S. equities as investors adjust rate cut expectations.
  • Mostly higher stock performance during the holiday-shortened week.
  • Growth stocks drive the advance; Information technology, particularly AI giant NVIDIA, outperforms.

Earnings Season Highlights:

  • Fourth-quarter earnings reporting in early stages, with only 23 S&P 500 companies releasing reports.
  • Boeing’s stock faces a sharp fall after earnings release, recovers later in the week.

Mixed Economic Indicators:

  • Manufacturing activity index in New York hits lowest level since the pandemic.
  • Retail sales in December exceed expectations, signaling a robust consumption side of the economy.
  • Consumer sentiment index surges to its highest level in nearly three years.


Rate Cut Expectations:

  • Expectations for rate cuts in 2024 drop sharply.
  • Futures market indicates a 13.1% chance of seven or more rate cuts in 2024, down from 61.5%.
  • Fed Governor Waller’s comments contribute to the decline in rate cut expectations.

Market Trends and Bonds:

  • Benchmark 10-year U.S. Treasury note sees a sharp increase in yield, reaching its highest level since December 12.
  • Municipal bonds trade lower against rising Treasury yields.
  • U.S. investment-grade corporate bonds generate negative returns as yields rise, though spreads tighten.
  • High yield market remains supported with oversubscribed deals and elevated cash balances.
  • Bank loan market focuses on repricing and refinancing in a heavy primary market activity.

China

  1. Stock Market Performance:
    • China’s stocks decline with weak economic outlook.
    • Shanghai Composite Index falls 1.72%, eighth weekly drop in nine weeks.
    • CSI 300 drops 0.44%, ninth weekly decline in 10 weeks.
    • Hang Seng Index in Hong Kong plunges 5.76%.
  2. Economic Indicators:
    • China’s Q4 GDP grows 5.2% YoY, meeting official annual growth target.
    • Quarterly GDP growth at 1.0%, reflecting underlying growth.
    • Retail sales rise 7.4% YoY in December, below expectations.
    • Fixed-asset investment grows 3.0% for the full year; real estate investment declines.
    • Industrial production in December exceeds expectations.
    • Urban unemployment edges up to 5.1%.
  3. Monetary Policy Moves:
    • People’s Bank of China injects RMB 995 billion via medium-term lending facility.
    • Lending rate remains unchanged, disappointing traders.
    • Analysts predict potential policy loosening and a cut in the reserve requirement ratio to boost demand.
  4. Real Estate Market Challenges:
    • New home prices in China fall 0.4% in December, marking sixth consecutive monthly drop.
    • Fastest fall since February 2015, despite efforts to prop up the real estate sector.
    • Real estate slump remains a significant economic headwind.

These points provide a snapshot of China’s economic and market conditions, reflecting challenges in real estate, economic indicators, and monetary policy expectations.

Despite a small increase, U.S. stocks conclude with adjusted rate cut expectations.
Over the holiday-shortened week, equities overall rose, although an equally weighted S&P 500 Index lost slightly and growth companies dominated. Semiconductor shares helped IT stocks outperform. AI chip powerhouse NVIDIA and rival AMD were strong. On Martin Luther King, Jr. Day, markets were closed Monday.

With only 23 S&P 500 businesses slated to report fourth-quarter earnings this week, the season was still young. After Boeing posted profits on Tuesday, Dow Jones Industrial Average component Boeing shares tumbled dramatically after an analyst downgrade warned of delivery delays if regulators find further 737 MAX safety issues. The stock recovered much of its loss later in the week.

Manufacturers struggle when consumers become more optimistic.
Data from the week showed dramatically differing economic outlooks. T. Rowe Price dealers observed that a drop in a New York manufacturing indicator to its lowest level since early in the epidemic weighed on confidence Tuesday. Our traders said a similar Mid-Atlantic measure issued Thursday also surprised little on the negative, although it appeared to relieve investors’ concerns after the early news.

Conversely, Wednesday’s December retail sales statistics substantially above estimates, indicating that the economy’s spending side remained strong. October retail sales rose 0.6%, with internet sales up 1.5% to a record high. The University of Michigan said on Friday that its consumer mood index soared to its highest level in almost three years and the most since 2005 in January and the most since 1991 over the past two months. Head researcher Joanne Hsu told Bloomberg that the rise showed consumers now realized “inflation has truly turned the corner.”

Waller sees little urgency in decreasing prices.
According to the CME FedWatch Tool, futures markets priced 13.1% of seven or more rate cuts in 2024 as of Friday’s close, down from 61.5% the week before. March rate cut odds declined from 81.0% to 47.4%. Fed Governor Christopher Waller told a video conference Tuesday that “I see no reason to move as quickly or cut as rapidly as in the past” given the strong economy, which contributed to the fall.

Waller’s comments helped push the 10-year U.S. Treasury note yield up for the week to its highest intraday level since December 12. Bond prices and yields move oppositely. Tax-exempt municipal bonds fell amid rising Treasury yields and large primary issuance. Our traders saw conflicting reactions to the new concerns in the primary market. Reinvestment cash fell in January, weakening the technical backdrop.

The week saw negative returns for U.S. investment-grade corporate bonds as corporate bond yields increased alongside Treasury yields, while our traders saw tightening spreads. Despite being oversubscribed, more issues were released than expected. High cash balances and little net new issuance supported the high yield market, and most offerings were oversubscribed, according to our traders. The bank loan market focused on repricing and refinancing in the primary market.

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