US Treasuries extended their losses (= rising yields) and the USD rose to an almost two-month high against its peers after Fed Chairman Jerome Powell further pushed back hopes of lower interest rates. Friday's sensational US labor market report (NFP) reinforced expectations that the Fed has little room to cut rates any time soon.
The market therefore no longer expects the Fed to cut rates in March (although expectations had been over 90% in the meantime). Powell said there was a “danger of moving too soon” when “the job is not quite done” = i.e. the fight against inflation. I've said in the past and I'll say it again – the Fed will certainly try to avoid the mistake of cutting rates too soon – there's no pressure to cut them now, especially when GDP growth and the US labor market remain so robust. Analysts and investment banks are also now lowering their rate cut expectations for the Fed – very late. As part of my advisory work, where I also advise investment and commercial banks, I have always emphasized that I consider Fed rate cuts in March to be very unlikely and have generally gone against the in-house analysts – who are now, however, turning the other way.
Global equities are mixed. After a solid start in Europe, shares fell again at the opening of the NYSE. There is little change on Wall Street.
With the probability of a rate cut next month only around 10% according to swap markets (I still give it 0%), analysts are increasingly concerned about the ongoing stock market rally. I agree that the rally has gone a long way. However, we have seen very strong US economic data and the prospect of rate cuts later this year remains. I wouldn't panic and sell everything here, but we need to be increasingly cautious as the bar for further gains (including for the outperforming mega-cap tech companies) rises.
There will be more comments from Fed officials today and later this week which will further increase the certainty that there will be no Fed funds rate in March.
In corporate news, UniCredit rose around 7% after a good set of results, which also helped European financials. Estee Lauder climbed 19% in pre-market trading after the company announced plans to lay off between 3% and 5% of its workforce. The cosmetics giant also issued a high sales forecast. Novo Nordisk, Europe's most valuable company, gained another 2.5% after agreeing to buy three manufacturing plants for $11 billion to meet rising demand for obesity drug Wegovy and diabetes drug Ozempic.
As yields and the USD continue to rise, pressure on the outperforming growth sector is increasing. Lower rate cut expectations and rising yields are also putting pressure on commodity prices, including oil, industrial and precious metals.
I expect a mixed market today. Last week's strong gains in tech will continue to boost chip stocks. Overall, however, the bar has been raised for further broad gains – I expect some profit taking overall.
👁 ROB'S MARKET OVERVIEW:
February 05, 2024
🌐/🇺🇸 Global/US Markets ↕️/↘️
Cyclical Stocks ↕️/↘️
Tech/Growth Stocks ↕️/↘️ (chip / AI stocks remain bullish)
Financial Stocks ➡️/↘️
Defensive Stocks ↘️/➡️
Energy Stocks ➡️/↘️
Materials Stocks ↘️
USD ↗️/➡️ (continues to benefit from higher yields; short-term gains limited)
GBP, AUD, CAD ↘️
⚡️Cryptos ➡️ (mostly sideways – range $42.5K – $44K / slightly bullish)
(*↗️ bullish, ↘️ bearish, ➡️ sideways / stable, ↕️ mixed / volatile)