Weekly Review: 2024 "opens to darkness"! Global stocks and bonds sold off wildly, the U.S. dollar counterattacked, and the Japanese yen suffered a double blow

Market overview from January 1st to January 5th: Last week, the global market suffered a "black start" in 2024. The central bank's interest rate cut carnival party came to an abrupt end. Traders repriced interest rate cut bets. The minutes of the Federal Reserve meeting and last Friday's non-farm payrolls report were updated. It is to "add fire" to this. Japan suffered two major disasters at the beginning of the year: an earthquake and a plane crash, which brought uncertainty to the political arena and central bank policies. Mixed data from major Asian countries clouded prospects for economic recovery and prompted calls for further policy support.

In terms of market performance, last week the three major U.S. stock indexes ended nine consecutive weeks of gains, the pan-European stock index fell for the first time in eight weeks, the 10-year U.S. bond yield returned to the 4% mark, and the U.S. dollar index fell for the first time in a month. rose, gold ended three consecutive weeks of gains, and the yen fell for four consecutive days.

Foreign exchange market: The U.S. dollar index had its best start to the year since 2011. The retracement of bets on the Federal Reserve's interest rate cuts gave bulls a boost. The U.S. dollar index continued to rise from around 101.35 at the beginning of the week, reaching a maximum of 103.03. It fluctuated sharply last Friday and finally closed at 102.439. , the overall increase that week was more than 100 points, an increase of more than 1%, ending the previous three consecutive weeks of decline.

As the U.S. dollar counterattacked, the euro suffered severe selling on the contrary. It continued to decline from above 1.10 at the beginning of the week. Last Friday, it even fell below the 1.09 mark and once touched the 1.0877 level. It finally closed at 1.0940 that week, a weekly drop of nearly 100 points. or 0.88%, after rising for three consecutive weeks. The British pound experienced sharp ups and downs last week. It plummeted by more than 100 points last Tuesday, falling below the 1.27 mark and hitting a low of 1.2610. In the following three trading days, it tried to recover the decline and finally closed at 1.2716. It fell slightly by 0.11% that week, losing the previous three consecutive weeks. Closing momentum. The Japanese yen fell sharply last week. The USD/JPY pair rose strongly in three of the five trading days. It exploded from around 140.85 at the beginning of the week, reaching the highest level of 145.97, approaching the 146 mark, and finally closed at the 144.53 level. It rose 2.51% that week. Two major disasters in Japan also added uncertainty to the timing of the central bank's exit from negative interest rates.

In commodities, against the backdrop of the enthusiasm for central bank interest rate cuts fading, gold showed a volatile downward trend last week. Since it was above US$2,060 at the beginning of the week, it has been going downhill. Last Friday, stimulated by the strong non-agricultural sector, it even touched US$2,024. , the weekly increase was close to $20, reaching 0.85%, ending the previous three consecutive weeks of gains. At the same time, spot silver fell for three consecutive trading days since the beginning of the week, and soon fell below the $23 mark. Then it barely rebounded last Thursday and Friday, and finally closed above $23 at $23.26, still down 2.52% for the week. , closing down for the second consecutive week.

Crude oil markets rebounded to more than a week high. WTI February crude oil futures closed up 2.24% at $73.81/barrel; Brent March crude oil futures closed up 1.51% at $78.76/barrel, and U.S. oil and U.S. oil both set new closing highs in more than a week. Last week, U.S. oil rose by about 3% and Brent oil rose by 2.23%, the largest weekly increase since October 13. It rose after falling back the previous week and rose for the third week in the last four weeks. In the 13 weeks since the outbreak of the Palestinian-Israeli conflict, last week was the fifth week for crude oil to rise. The cumulative rise in crude oil this week as the US dollar rebounded was mainly due to the tense situation in the Middle East and the closure of Libya's largest oil field.

Global stock markets: U.S. stocks had a bad start last week, with major stock indexes falling across the board. The S&P's previous record of longest weekly gains since 2004 came to an end. The S&P fell 1.52%, the Dow fell 0.59%, the Nasdaq fell 3.25%, the largest weekly decline since the week of March 10, the Nasdaq 100 fell 3.09%, all ending nine weeks of consecutive gains, and the Russell 2000 fell 3.75%. , falling for two weeks in a row after rising for six weeks. Pan-European stock indexes fell for the first time in eight weeks.

In the bond market, the U.S. 10-year benchmark Treasury bond yield quickly tested 4.10% in the short term on Friday, pushing up to 4.10% for the first time in three weeks. It has risen for two consecutive days and has risen by about 17 basis points this week. The yield on the 2-year U.S. Treasury note, which is more sensitive to the interest rate outlook, has risen by about 13 basis points this week, ending three consecutive weeks of decline like the yield on the 10-year U.S. bond. Judging from the increase in yields in the first week, the 2-year U.S. Treasury bond had its worst first week of the year since 2005.

Calculated in terms of evaporated market value, 2024 is the worst start in history, with global bond and stock markets losing more than $3 trillion.

A summary of the week’s headlines:

U.S. non-farm payrolls use ISM data to cause trouble

The Federal Reserve's interest rate cut craze at the end of last year encountered a retracement in the first week of 2024. Traders began to rethink whether interest rate cut expectations were too radical. Last Friday's strong non-agricultural data strengthened the possibility of a soft landing for the economy and postponed the central bank's interest rate cut in March. As expected, however, the subsequent U.S. ISM service PMI contradicted this, which prompted a sudden reversal in the global market.

Last Friday, the U.S. Bureau of Labor Statistics released data showing that the U.S. non-farm payrolls increased by 216,000 in December, which was not only much higher than the consensus forecast of 171,000, but also higher than almost all analysts’ expectations and higher than in November. Revised 173,000. Increases came mainly from the health care, government agencies, construction, and leisure and restaurant industries, but transportation and warehouse jobs declined. For the whole of 2023, non-agricultural jobs will increase by 2.7 million, lower than the 4.793 million in 2022, but higher than the pre-epidemic level.

At the same time, the unemployment rate remained unchanged at 3.7% in November, lower than the expected 3.9%; wages increased more than expected, and the average hourly wage growth accelerated from 4% in November to 4.1% year-on-year, which did not slow down to 3.9% as the market expected. 3.9%. The average weekly working hours was 34.3 hours, slightly lower than market expectations.

The strong non-farm payrolls report showed that the U.S. labor market remains solid, exacerbating market concerns that expectations for an interest rate cut by the Federal Reserve may be too aggressive.

After the data came out, the U.S. 10-year yield once rebounded by 11.7 basis points to 4.104%, and then retreated slightly; the 2-year yield, which is more sensitive to interest rates, also rebounded by 11.2 basis points to 4.494%.

Expectations for an interest rate cut have further cooled. Swap contracts show that the chance of the Fed cutting interest rates in March has dropped from more than 60% before the data was released to less than 50%. The full-year interest rate cut will be about 1.28%, which is lower than Wednesday's estimate of about 1.45%.

Randall Kroszner, a professor at the University of Chicago who was a former governor of the Federal Reserve, said that because the job market is quite strong, the Fed will obviously wait a little longer before cutting interest rates. White House Chief Economic Adviser Brainard said in an interview with CNBC that the employment report reflects that the economic situation is very healthy. Wages have increased over the past year, core inflation has fallen, and supply chain pressure has dropped to pre-epidemic levels.

However, the U.S. ISM non-manufacturing index, released after the U.S. stock market opened, fell more than expected in December, hitting the largest month-on-month decline in nine months, reflecting the unexpected slowdown in corporate expansion in the service industry, the main contributor to GDP. The employment sub-index in December It also hit a new low in more than three years, signaling a cooling of the labor market.

The U.S. service industry index fell to 50.6 last month, which was worse than the expected 52.6 and the lowest level since May; the service industry employment sub-index fell to 43.3, the lowest number since July 2020.

After the data was released, U.S. bond prices jumped, and yields accelerated to give up the gains after the non-farm payrolls report. The 10-year yield fell below 4.0% in early trading on U.S. stocks, and the two-year yield returned to a downward trend, and fell again at midday. pick up.

After the ISM data, the market's expected probability of the Federal Reserve's interest rate cut in March rebounded, and finally almost remained the same as Thursday's level. Overall, the expected probability for the whole week is still downward.

In the first week of 2024, which had only four trading days due to the New Year's Day holiday, the combined market value of global stock and bond markets evaporated by more than US$3 trillion, marking the worst start to the new year in more than 20 years.

Fed minutes dampen interest rate cut craze

This week's closely watched minutes from the Federal Reserve meeting failed to support the interest rate cut expectations that drove the stock market carnival last year, giving momentum to dollar bulls.

Fed officials thought they were done raising interest rates when they decided to hold off last month, but the minutes of the meeting did not reveal they discussed when to start cutting rates. After the minutes were released, U.S. bond yields surged to intraday highs and the U.S. dollar index rose.

The minutes of the meeting showed that Fed policymakers believed that the risk of upward inflation has declined and that a rate cut would be appropriate in 2024, but did not provide a signal on when to cut interest rates. They said that the path of interest rates is very uncertain and that further interest rate increases may still be due to economic needs. Many policymakers also expect Interest rates may remain high longer than expected.

Regarding the uncertainty of the interest rate path, the minutes stated: "When discussing the policy outlook, participants believed that the policy interest rate may be at or near the peak of this tightening cycle, however, the actual policy path will depend on how the economy develops."

Some commentators said that the minutes were far less dovish than the dovish bias revealed by Fed Chairman Powell after the meeting last month, and some commented bluntly that this was new hawkish news.

The minutes of the meeting also showed that almost all participants in their submitted forecasts suggested that the target range for the federal funds rate by the end of 2024 should be lower. However, these participants also said that their expectations are associated with an unusually high degree of uncertainty, and that the way the economy develops may make raising interest rates a more appropriate move. Participants continued to generally emphasize caution and reliance on data, and reiterated that in order to ensure a significant and sustainable fall in inflation, it is appropriate to maintain a tightening stance for a certain period of time.

Ian Lyngen of BMO Capital Markets said, "Overall, this was a hawkish update from the Fed," although "the tone clearly didn't go unnoticed."

Nick Timiraos, a well-known macro journalist and known as the "Fed's mouthpiece," said that the meeting minutes did not show a meaningful discussion on the important issue of when to cut interest rates.

Timiraos further pointed out that the meeting minutes also showed disagreements within Fed officials. Some officials believe the easy part of fighting inflation is done and higher interest rates will be needed to curb economic activity as supply chains and labor markets recover from pandemic-related disruptions. Other officials, meanwhile, see the potential for supply-side improvements to continue, prolonging a period of relatively easy and cost-free inflation.

Two major disasters in Japan increase central bank policy uncertainty

Japan has had a bad start to the year. The devastating earthquake and fatal plane crash have not only troubled the Japanese government, which is suffering from internal and external worries, but also made it more difficult for the Bank of Japan to cancel negative interest rates this month, and the yen's decline has intensified.

A strong earthquake of magnitude 7.6 occurred in the Noto area of Ishikawa Prefecture, Japan on January 1. According to Japan's Kyodo News Agency report on the 6th, the Noto Peninsula earthquake has killed 110 people in Ishikawa Prefecture. Data released by Ishikawa Prefecture that day showed that the earthquake also injured 516 people in the prefecture, and another 211 people are missing.

At 16:10 local time on the 1st (15:10 Beijing time), a 7.6-magnitude earthquake occurred on the Noto Peninsula in Ishikawa Prefecture, Japan and triggered a tsunami. The Japan Meteorological Agency named the earthquake the "Noto Peninsula Earthquake."

In addition, on the evening of January 2, local time, a Japan Airlines A350 passenger plane that landed at Tokyo Haneda Airport collided with a Coast Guard aircraft and subsequently burst into flames. Within about 10 minutes after the passenger plane landed and caught fire, all 379 people on board were safely evacuated. Five of the six people on board the Coast Guard plane died, and the captain was seriously injured.

Japan's Ministry of Land, Infrastructure, Transport and Tourism identified the plane collision as an aviation accident on the 2nd, and the Japan Transportation Safety Board began an investigation on the 3rd. The Japan Metropolitan Police Department will also investigate suspicions of casualties caused by business negligence and will set up a search headquarters.

Before both tragedies, there was already speculation that Kishida Fumio's days as prime minister might be numbered as he spends much of the final weeks of 2023 dogged by Japan's most wide-ranging political scandal in decades. In one major opinion poll, disapproval of his cabinet reached its highest level since 1947.

The next few months may be a make-or-break moment for Japan's prime minister. He faces two key events in March: passing a national budget in a parliament dominated by his ruling Liberal Democratic Party and a possible state visit to the United States that could either boost his approval ratings or clear the way for him to step down. the way.

"The prevailing view is that he will probably hold out until the budget is passed," said Gerald Curtis, a professor emeritus at Columbia University who has written several books on Japanese politics. "Then he would have to resign."

Parliament usually approves the budget at the end of March. Curtis added that Kishida may resign sooner depending on further details of the investigation.

Last Thursday, Kishida Fumio promised to do everything possible to restore public trust. He also devoted himself to helping those struggling to recover from the strong earthquake. Strong earthquakes caused buildings to collapse, houses to be destroyed, and the lives of tens of thousands of people to be ruined.

In addition to the impact on the political arena, the timing of the Bank of Japan's policy shift has also been affected. Morgan Stanley MUFG Securities changed its forecast for the Bank of Japan's interest rate decision this month and now expects the Bank of Japan to maintain its current monetary policy unchanged, in part because it must assess the negative economic impact of the Noto Peninsula disaster.

While speculation about a January adjustment is fading, many still expect negative rates to end in April or later in 2024.

The yen had been widely expected to strengthen in 2024 on speculation that the Federal Reserve would begin cutting interest rates in the first half of the year, while at the same time the normalization of Japan's ultra-loose monetary policy would narrow the yield gap between the United States and Japan.

"While there must be a significant number of foreign investors expecting negative interest rates to end in January, in this case the Bank of Japan will almost certainly not Take action every month. If negative interest rates are not canceled in January, the end of negative interest rates in the first half of 2024 will also become unknown."

Mari Iwashita, chief market economist at Daiwa Securities Co., canceled her forecast for an end to negative interest rates in January. "It seems even less likely that the Bank of Japan will act in January," Iwashita said.

She said the quake could dampen production activity and the government may have to draw up a supplementary budget for recovery measures. Iwashita now expects negative interest rates to exit in April.

"Any lingering expectations of an end to negative interest rates in January are completely dashed," said Ataru Okumura, senior Japan rates strategist at SMBC Nikko Securities.