US markets took a breather near all-time highs in Wall Street’s final session for 2023, pointing to signs of exhaustion. The US 10-year yield rose slightly but ended 2023 flat amid a narrative that central banks will cut rates in 2024. Flows into the dollar continued on the first trading day of the new year, supported by weekend risk-off events.
Chart: EURUSD
The White House said consumer spending increased over the holiday season, with spending at restaurants up 8%, online sales 6% higher and overall retail spending at 3%. Coupled with real wage gains over the nine months prior and a jump in consumer confidence, all pointed to a good economic start for 2024. The greenback gained some support from rising yields last Friday and started this year on a firm footing, but rate-cut bets kept a lid on despite still pressuring the yen. The Japanese currency had initially strengthened after a magnitude 7.6 earthquake hit Japan on Sunday but then reversed and weakened further. Above the 140 round support, all eyes turn to the 200-day SMA hovering near 143.
While traders expect the Fed to cut rates in March, economists believe the ECB will cut in Q2. On the one hand, the ECB is slower and may not cut rates until Q3, but on the other, the economy is weaker, pointing to earlier cuts. However, inflation in the eurozone is nearing the ECB’s 2% target, while inflation remains higher in the US and the UK. After two years of losses, the euro gained over 3% against the dollar in 2023 due to expectations that the Fed may cut before the ECB. The year’s high of 1.1143 reached last Thursday remains a big hurdle for bulls, whereas, on the flip side, short-term support can be seen at 1.10.
UK food inflation fell to an 18-month low of 6.7% in December from 7.8% prior, driven by Christmas promotions and seasonal shop offers. The slowdown has raised hopes that the squeeze on household finances from high prices is starting to ease. The British pound closed the last trading session of the year flat, leaving behind support below 1.27, eying resistance at 1.2776.
Oil prices jumped 1.5% after US forces repelled Houthi militants in the Red Sea. Analysts see crude averaging slightly higher than in 2023 due to geopolitical tensions but remain vigilant on weak global growth. China’s upcoming Lunar New Year holiday and potential new stimulus measures are also expected to boost oil demand and support prices. WTI registered a 3-day loss to close the year in the red last Friday, but Tuesday’s new year’s session saw prices moving further away from the $70 barrier and towards $73.75 a barrel.
Chinese stocks fell on Tuesday, driven by weak manufacturing and home sales data pointing to slower economic growth. China’s factory activity contracted to the lowest level in December in six months, and home sales fell sharply. The weak array of data may lead to expectations for more stimulus after leaders pledged to maintain a pro-growth stance in 2024. In the last trading session of 2023 on Friday Chinese stocks gained, helped by year-end position adjustments and foreign buying. However, foreign funds withdrew 3.6 billion yuan from onshore equities on Tuesday. The Chinese Yuan slid to a June low of 7.088 before reversing to a positive close on Friday and continuing to ascent early Tuesday, heading towards 7.15.