Markets Broadly Greener Despite Conflict 

Gold jumped to a record high amid mounting expectations of rate cuts next year, whilst stocks enjoyed a mixed open on Monday after a strong week that saw the S&P 500 notch a fresh YTD high. Equities rallied on Friday along with bonds with worse-than-expected US ISM data underlining the slowing economy narrative. Attacks were reported on US ships in the Red Sea, raising fears about escalation in the Middle East, though this did nothing to boost crude prices as oil sank for a third day to retest the mid-November lows – nothing for OPEC to cheer. Meanwhile Venezuela voted to claim sovereignty over an oil-rich region of neighbouring Guyana – there have been rumours of military action being a possibility. Meanwhile the dollar firmed up a bit and Bitcoin rose above $40k. 

Wall Street Soaring 

The FTSE 100 slipped about 0.3% in early trade as oil prices dragged on the energy majors. It rose 1.5% last week amid broad positivity for stocks as yields declined. In Frankfurt the DAX rallied a quarter of a percent to approach the all-time high from the summer. The CAC in Paris was steady. Wall Street’s indices rallied on Friday with the S&P 500 closing at its highest since March 2022, whilst the Dow Jones extended its run to take its YTD gains to more than 9%.  Markets seem to be pricing in a lot of good news despite economic growth wobbling – perfect disinflation, a super-dovish Fed … too good to be true? Companies and markets have adapted to higher rates well, but the recent drop in bond yields betrays an exuberance that seems to be very optimistic. 

Cuts Anytime Soon? 

Fed chair Jay Powell pushed back against the market pricing in aggressive rate cuts in 2024 and said inflation is still "well above" target. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” he said. He can push back all he likes but the market is not listening – odds of a cut as soon as March stand at 60%.   

Gold Glitters Before Reversal 

Gold spiked higher overnight to take out a record highs above $2,100 as real rates came under increasing pressure; the 10yr TIPS yield testing 2.0% whilst the benchmark 10yr Treasury yield held below 4.25%. Gold touched a new all-time high at $2,148 before turning sharply lower in a brutal reversal. This seems to be all on aggressive rate cuts by CBs next year that may not appear.  

What's Next? 

Looking ahead to this week, the Reserve Bank of Australia pause again after raising rates 25bps in November. Lat month the central bank indicated it may not seek to raise again, refraining from repeating a phrase in October statement that “some further tightening of monetary policy may be required”. Australia’s Inflation for October gives the RBA reason to pause, with it slowing to 4.9% from 5.6% last time and against a forecast 5.2%. Then Friday is jobs day! A month ago, the data was confirmation bias for many that the Fed is done. Nonfarm payrolls increased by 150,000 in October, whilst the previous month was revised down quite a bit. The NFP helped cement the narrative that the Fed is not only done with hikes but may be aiming to cut soon – markets have started to price in a better-than-evens chance it cuts rates by Mar 2024. The unemployment rate edged higher to 3.9% from 3.8% in September, while annual wage inflation softened to 4.1% from 4.3%. The report is the last major piece of economic data ahead of the FOMC’s December 12-13thmeeting. The headline number is fc at 185k, wages +0.3% and unemployment 3.9%.