The rally in stocks and bonds is taking a pause after strong gains in November as the market reassesses rate cut expectations.
The yield on the 10-year Treasury climbed five basis points to 4.25%, while US equity futures settled broadly lower in pre-market. Bitcoin crossed the $41K mark while gold briefly hit an all-time high. Both are now facing some headwinds due to higher yields and a stronger USD.
A series of economic reports are expected this week which will shed light on the state of the US labor market and whether the markets have gone too far with their rate cut expectations – in my opinion there is little room for further optimism. Betting on a soft landing in combination with rate cuts also means that the markets are still expecting a near-perfect scenario.
However, while inflation – especially in the Eurozone – is becoming less of a concern, the focus is turning to earnings growth and economic activity.
There is plenty of room for disappointment, with swap markets expecting the Fed's first rate cut with a greater than 50% probability in March – a scenario that I think is highly unlikely.
These views will be put to the test tomorrow with the latest US labor market data (JOLTS) for October. This report will be followed by the ADP national employment report on Wednesday and non-farm payrolls on Friday. The labor market will be difficult for markets to digest, as a slowdown in the labor market would be seen as positive for rate cut expectations, but could also heighten concerns about an impending recession.
Much of the disinflation was also due to weaker oil and gas prices this year. The market is not pricing in the risk of reflation if oil prices were to rise sharply again and demand expectations were to increase again.
We expect little trading volume today but overall profit taking. We have a quiet economic calendar and no major earnings reports (only NIO). However, the market is still pricing in ideal conditions, which will be put to the test this week with important labor market data.
At the moment, we expect Fed rate cut expectations to recede somewhat, which would lead to rising yields, a stronger USD and some headwinds for equities and commodities. However, uncertainties and escalating geopolitical tensions are maintaining demand for safe havens.
We also see headwinds for risky or commodity-sensitive currencies such as the GBP or AUD.
👁 ROB'S MARKET OVERVIEW:
December 04, 2023
🌐/🇺🇸 Global/US Markets ↘️/↕️
Cyclical Stocks ↘️
Tech/Growth Stocks ↘️
Financial Stocks ↘️
Defensive Stocks ➡️/↘️
Energy Stocks ↘️/➡️
Materials Stocks ↘️
USD, JPY ↗️
GBP, CAD ↘️/➡️
(*↗️ bullish, ↘️ bearish, ➡️ sideways / stable, ↕️ mixed / volatile)