Santa Rally Turned January Effect? 

European stocks advanced to a fresh 23-month high on the first day of trading in 2024 as the generally positive attitude to risk that we have seen since the end of October continued into the new year. The mood is still pervasively optimistic; that is everyone seems to assume a soft landing and rate cuts in the first half. All stock sectors rallied as the Stoxx 600 pushed up another two-thirds of one percent having made double digit gains last year. The DAX rallied more than one percent in early trade to near 17k, whilst the FTSE 100 added 0.3% to hit 7,764, its best in a year. Spain and Italy both rallied well over one and a half percent after notching thumping gains in 2023. Overnight on Tuesday shares in China and Hong Kong, among the worst performers last year, fell whilst Australia’s ASX advanced within a whisker of its all-time high. Treasury yields are the firmest they’ve been in a while with the 10yr to 3.94%, with UK gilt yields rallying 10bps this morning to 3.64%.   

Oil Coming Up as Tensions Rise 

Oil prices jumped as US naval forces repelled a Houthi attack on a container ship in the Red Sea...Iran has sent a ‘warship’. Worries about escalation in the Middle East continue to exert some influence on crude though the fundamentals remain more suspect as we head into the new year and a slowdown thanks to all that tightening by central banks last year. The futures curve for WTI is interesting with contango into the spring/summer and back into backwardation by the autumn.   

Key data Incoming 

Looking ahead to the rest of the week … two main events for markets tomorrow are the ISM manufacturing PMI from the US and the JOLTS job openings data. The last ISM report came in at 46.7 and showed economic activity in the manufacturing sector contracted in November for the 13th consecutive month following a 28-month period of growth, however prices did pick up. Job openings, meanwhile, were softish last time out. Jolts job openings slid to 8.7 million in October, which was well below estimate, to the lowest level since March 2021. At the same time the ratio of vacancies for every unemployed worker fell to 1.3, getting much closer to the pre-pandemic high of 1.2. But still, it’s hardly a recessionary reading.  

China and Global Inflation 

China data was a bit better. The Caixin/S&P Global manufacturing PMI rose to 50.8, its fastest expansion in seven months. Over the weekend the official PMI showed a third straight monthly decline.  EZ final mfg PMI came in at 44.4 vs the 44.2 flash estimate – sluggish, signals contraction. China’s Caixin services PMI will be the focus for the Asian session on Thursday along with the final Japanese manufacturing PMI data. German preliminary CPI inflation reports come in all morning from the various states with the spectre of deflation stalking the scene. Swiss CPI is also due ahead of the weekly unemployment claims data and ADP nonfarm employment report, which will be tasters ahead of the main NFP release from the Bureau of Labor Statistics on Friday. 

Friday is Jobs Day 

The December payrolls report comes as labour market data has generally underscored the soft-landing narrative favoured by most investors at the moment. November’s report showed unemployment fell to 3.7% from 3.9%, whilst the headline payroll number was 199k vs 150k in the prior month. December’s number can be noisy and tricky however due to seasonal factors. The key thing for markets is whether it’s showing enough of a cooling to justify the Fed cutting rates early next year or will it hold up and sustain inflation for a bit longer? 

USDJPY – trying to rally with sellers looking a bit tired