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Andreas Zanin
Analysis, Market Analysis | December 18, 2023

JASPER’S MARKET SQUAWK 18-12-2023

Markets vs. Fed Expectations Widen

Policymakers’ pushback against March rate cuts sparked new rhetoric that loosening financial conditions makes the Fed’s case for rate cuts harder. Policymakers signalled three cuts, but markets are pricing in up to six beginning in March, confirming the excess optimism. Nasdaq hit new record highs in the midst of the bond rally, but the widening divergence put a lid on gains.

Chart: EURUSD

Key Factors for Today

  • Record Highs for US-Tech Supported by Bond Rally
  • Dollar Strength Puts Gold on the Defensive
  • Eurozone Under Recession Spectacle
  • BOJ May Exit Negative Rate Policy in April 2024

Bond Rally Boosts US-Tech to New Record High

The Fed’s dovish pivot turbocharged a bond rally, but some feel alarmed by the divergence between the market and the Fed. In that vein, two Fed officials pushed back on expectations of March rate cuts, pointing to markets overreacting. New York Fed President John Williams said March was “premature” to discuss, whereas Atlanta Fed President Raphael Bostic foresees two rate cuts in 2024 but not until Q3. The bond surge has helped lift the Nasdaq to a record high, but the tech index appeared to have lost momentum by the close as the officials’ remarks hit the wire—16500 in back into the spotlight. Meanwhile, official data and CBO forecasts see inflation falling to end the fight against rising prices.

Gold Comes Under Pressure From Stronger Dollar

The S&P Composite Output Index expanded to a 5-month high of 51.0 from 50.7 in November. However, most gains came from the services sector rising past expectations of 50.6 to 51.3. Manufacturing activity declined further to 48.2 from 49.3 expected. New orders and worker demand increased, indicating stronger growth, but with input prices rising, inflationary pressures remain. The rise in DXY caught gold bulls off guard, weakening the commodity 0.85% to $2020 an ounce. While trading under $2050, the risk of retesting the $2K barrier remains high.

Eurozone Data Point to Recession

Eurozone’s PMI activity for the Manufacturing and Services sectors declined, indicating contraction and a likely recession. Activity also declined in Germany and France, the two largest eurozone economies. Germany’s economy is expected to contract slightly this year and barely grow in 2024. Italy and Portugal also cut their growth forecasts, citing weaker data. ECB’s Villeroy said the bank’s hikes are having a slightly faster effect on the real economy than expected. He added that the ECB should cut next. Euro witnessed a major reversal below $1.09 against a firmer greenback, opening the door to $1.0862 unless it bounces at the round support.

Poll Shows BOJ is Expected to Abandon NIRP in April

A Reuters poll sees analysts forecasting April 2024 as the earliest meeting the BOJ could scrap its negative interest rate policy (NIRP) and start tightening, joing a select-few central banks tightening. The BOJ will meet on Tuesday amid increasing speculation that it will move away from negative interest rates in 2024. No change is expected at this meeting, but policymakers could lay the groundwork for a shift. USDJPY closed mixed on Friday and is expected to range ahead of the policy meeting between 142.50 and 141.50. Breaking the top may lead to a higher range but is unlikely to move past 142.70.

On The Docket

  • Ifo Business Climate
  • CA New Housing Price Index
  • NAHB Housing Market Index
  • CN FDI (YTD)
  • RBA Meeting Minutes

FX 1-Day Relative Performance (USD)

  • Aussie 0.22% up, Kiwi 0.48% in the green
  • Euro and Pound 0.16% and 0.11% up
  • Loonie barely positive, Franc at +0.09%
  • Japanese yen 0.06% in negative territory
  • Gold 0.1% up, Silver leads at +0.4%
  • WTI and Brent 0.57% and 0.54% up
  • Natural gas 1.57% in green territory
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