The Saturday Hark Back - 06 Jan 2024
Capturing the themes of the week when there’s more time to digest them.
A volatile week to start 2024. As the calendar changed, some of the excesses of the Santa rally have been naturally reset, even financial markets have to go on a January diet.
The first week of 2024 was the opposite of Dec 2023, an historically bad equity open - led by Apple's sell off.
How many cuts in 2024? US fixed income "repriced", unwinding some of the excessive expectations but it was hardly a volatile reset.
The end of QT "discussion" appears in the Fed minutes
Mixed signals from the US labour market - it's bending but not breaking
Yellen, Barkin and "soft landing" consensus
Red Sea tensions underpinning Oil prices
Bitcoin ETF - we hate TradFi boomers but we can't wait for their inflows...
USDJPY - BoJ expectations, quake fall out and equity investment regulatory changes
#1. The first week of 2024 was the opposite of Dec 2023
Lower stocks, stronger usd, higher oil prices, higher rates, even bitcoin joined in on the sell off for a spell. Positioning couldn't withstand the first pullback of the year as pnl got reset to 0, whilst some of the year end "flows" that occur for tax reasons, rebalancing and/or window dressing also receded.
The MacroTourist by
- TURNING-OF-THE-CALENDAR OPPORTUNITIES
Capital Notes by Brant Hammer - Decoding the Santa Rally: Investor Psychology’s Role in January Market Trends
#2. How many cuts in 2024?
The softer side of the fixed income market was found, as the data wasn't horrific, Q1 supply hits, inflation in Europe was hotter than expected and the risk reward was for a pullback in rates into the NFP/AHE data set. However, after the nfp beat the big reset came on the ISM. Having spent all week commenting on the US labour market, it was in fact ISM's tumble lower towards 50 (50.6 vs exp 52.6) that dominated Friday's session. In particular the ISM Services Employment Index fell to its lowest level since the survey began in 1997 (43.3 vs prior 50.7) not including Covid shutdowns (The Boock Report). As a result, US2s rallied to 4.33%, 12bps off the NFP wides, something that
has gotten involved in.
#3. The biggest surprise from the Fed minutes was the need to discuss QT
The market has been looking for a hint that QT would end as the RRP pressures have heightened concerns that something would break before long. The Fed minutes obliged, hinting (Bloomberg) for the first time that they too see a need to limit their balance sheet roll off sooner rather than later or a least start that discussion to ensure "ample" reserves remain in play.
There is also a sequencing element. How can the Fed be tightening their balance sheet in H2 at the same time as cutting rates to reduce the pressure "real rates" are having on the economy. To get ahead of any mixed signals and as the board becomes more comfortable in inflation's path back sub 2%, they need to prepare the market for B/S changes. Powell has always emphasised a need to be consistent when it comes to their B/S.
has published an excellent piece (The Other Lever) on why understanding the Feds balance sheet is so important at this juncture.... "some folks are so entrenched in blaming the Fed’s money printing for inflation that they ignore the simple fact that the Fed has been shredding money via QT since mid-2022..... The fact is that rapid inflation occurred during a historic expansion in money supply and that rapid disinflation occurred during a historic contraction in money supply, just as a traditional understanding of monetary policy would dictate. And more importantly these shifts were not driven by interest rates, but rather by the Fed’s balance sheet policy."
#4. Jobs, jobs and err more jobs
We've written a lot about the US labour market this week. So, we'll leave the week in review to the Fed's WSJ's Nick Timiraos, A Goldilocks Jobs Report. "The December jobs report doesn't scream "change your policy stance " for the Federal Reserve. In fact, it doesn't change much of anything for the central bank."
However, if you were to read just two things this wkd on the US labour market, I would highlight
Friday Speedrun which discusses confirmation bias in reporting the figures as well as @darioperkins excellent thread on the "divine coincidence"... how much influence did the Fed and other CBs have on achieving a rebalancing in the job openings.#5. Yellen, Barkin and "soft landing" consensus
As our friends at MacroVisor have highlighted, "soft landing" is the consensus view now. This has been confirmed by recent speeches from Yellen and Barkin as well as hitting the Economist
Fed's Barkin - Heading for a Soft Landing?
"A soft landing is increasingly conceivable but in no way inevitable.
I see four risks. The U.S. economy could run out of fuel. We could experience unexpected turbulence. Inflation could level off at a cruising altitude higher than our 2 percent target. And the landing could be delayed as the U.S. economy continues to defy expectations.
Is inflation continuing its descent and is the broader economy continuing to fly smoothly? Conviction on both questions will determine the pace and timing of any changes in rates. There’s no autopilot. The data that come in this year will matter."
Bloomberg - Yellen Declares US Economy Has Achieved Soft Landing
Source: The Economist via @Mayehm4Markets
#6. Red Sea tensions underpinning oil
We're not maritime or commodity experts here @HarksterHQ, but one clear risk to the consensus disinflation story (although it may be too soon for the incoming data) is the freight costs induced by the tensions in the middle east. They've soared relative to the 6month average but are still nowhere near peak-Covid highs. As a result, the rally in crude/brent may well have the biggest impact as the disinflation trade becomes mainstream and the recent energy "base effect" savings that we've seen globally in Q4 inflation prints rolls off.
With 2024 the year of elections (more below), geopolitical tensions remain elevated (Russia/Ukraine, Israel/Gaza, Houthis attacks, US Chip act), but for now they're just bubbling along in the background, having no discernible impact on asset prices outside of the volatility seen in commodities...
Bloomberg - Attacks in the Red Sea Are Reconfiguring Global Trade Again
ZeroHedge - Spot Container Rates Surge By 173% Due To Red Sea Disruptions
Steno Research - Suez Watch: Massively rising Container freight rates, while Dry Bulk, LNG and Crude rates are more muted
Bloomberg - Iran Sends Warship to Red Sea After US Sinks Houthi Boats
FT - Maersk reroutes Red Sea ships ‘for foreseeable future’ as container rates shoot higher
#7. Bitcoin ETF
Bitcoin held in the best relative to the aforementioned position reset across assets. However, the Matrixport report (Why the SEC will REJECT Bitcoin Spot ETFs again) simply found the softer side of the market as the exceptionally high funding rates had implied a large long position was being held out there.
Jan 10th has emerged as the key date, when the SEC is set to rule on ARK / 21Shares application. Buckle up hodlers, volatility is set to remain high in the coming days as we get closer to their decision. Looks like the "easy" money was made on the expectations of the ETF that started in early Dec rather than the delivery of the decision in January. No matter your view on crypto, it's going to be interesting to watch how the defi, libertarian ideals at the heart of the crypto bull thesis collided with the regulatory overview of a TradFi etf.
Reuters - Crypto Wire
- - Coinbase and the Bitcoin ETFs: how strong is the bull case?
Reuters - BlackRock, VanEck among asset managers that submitted updated filings for spot bitcoin ETF
The Pomp Letter - The State of Bitcoin Heading Into 2024
What Bitcoin Did - 2024, the Year of the Bitcoin Bull with Lyn Alden
- - Bitcoin in the year of the halving
- #874 - All Systems Go
#8. USDJPY - BoJ expectations, quake fall out and equity investment regulatory changes
USDJPY was the main beneficiary of the US yield move (chart below), however there has been more to the move than the yield story, if anything 10s and USDJPY correlation looks stretched.
Local banks led by MUFG have pushed out any potential BoJ move until April, as they will need to assess the impact from the Noto Peninsula disaster as well as the Q1 wage agreements. (Bloomberg - Earthquake Raises Bar for BOJ to End Negative Interest Rates)
Will local money flow off shore as investment rules are revamped
The Japan Times - Revamped NISA program launched to spur investment wave in Japan
Across The Spread by Weston Nakamura - Japan Rejoins Global Markets: Watch US Equities as New NISA Launches
am/FX by Brent Donnelly - USDJPY and NOKSEK
USDJPY vs US10s
Source: tradingeconomics.com
Looking forward into 2024, the year of the election
We enter 2024 with some folks looking north and the AI fuelled, soft landing vibes to continue to support assets in Q1 with others looking south as bears re-appear, hoping their Q4 losses were simply seasonals in thin liquidity and the real rates maturity wall is set to hit and global rates have found a base. Is the market too optimistic on inflation?
- - 2024 Game Plan for paid subscribers (Eyes on Stalks)
- - 2024: The Recession Year?
With latest inflation readings running below target already (core PCE 3-months and 6-months annualised <2%), the US economy likely already needs new money. But bank lending is stalling, so more action is likely needed"
Bloomberg The Big Take - Stock Market 2024 Predictions: Wall Street Expects Rate Cuts, Mild Recessions
Bloomberg - Cheap China Stocks Lure Investors Who See 60% Slump as Rock Bottom
Apollo Academy - 2024: Lagged Effects of Fed Hikes Versus the Fed Pivot
ZeroHedge - January Stats & New Year Investing Resolutions For 2024
Saxo Bank - Equities: What to expect in 2024?
ZeroHedge - Will 2024 Be The Year Of The Other 493?
A Wealth of Common Sense - Animal Spirits: 2024 Predictions
- - Event risk for 2024 - Biggest Election Year in Human History
ZeroHedge - Your Guide To The 2024 Presidential Primary Season
Top 10 Reads of the Week on Harkster.com:
- - The Taiwan election and the Trade war
Bloomberg - US Pressured Netherlands to Block China-Bound Chip Machinery
- - Coinbase's fate is tied to Bitcoin
Bloomberg - Fed’s Balance Sheet Leaps Into Spotlight After Repo Volatility
Steno Research - USD Liquidity Watch: Stealth QE out of the 2024 gates?
FT - Russia pounds Ukraine in new year’s second massive air strike
ZeroHedge - Putin Vows Russia "Will Never Back Down" In Year-End Speech
Bloomberg - Use Mexican Peso, Chinese Yuan to Bet on US Election, Citi Says
The majority of these links appear in our new "HarksterPro - Intraday Market Colour" channel. If you click on "Select Channels", you should find under "Added Recently" our latest additions to the app. @HarksterHQ will use this new channel to flag good articles/sources of content as well as headlines/market moving events.
Top 5 Podcasts of the Week:
Unchained - Key Elements for Successful Spot Bitcoin ETFs
BlackRock - A Stock Picker's Guide To 2024
Oaktree Capital - The Insight: Conversations – Walking into the Unknown with Howard Marks, David Rosenberg, and Aman Kumar
The Week Ahead = CPI + XBT ETF
Fed pricing is about the pace of disinflation so US CPI dominates the week ahead previews as the market's pricing of > 5 cuts needs the disinflation miracle to continue.
Newsquawk - Week Ahead: CPI data from the US and China are the highlights; US earnings season also gets underway
Nomura - The Week Ahead - US, Japan and China CPI, Bank of Korea Meeting
SEB - Interesting data coming up at the start of the new year
S&P Global - Week Ahead Economic Preview: Week of 8 January 2024
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Busy week!