Markets have stalled in the first week of trading this year, unable to carry through last month’s momentum in the face of renewed concerns around the amount, pace and timing of potential Federal Reserve interest rate cuts.
The minutes from the latest Fed meeting earlier in the week appeared to dash any hopes of an imminent cut. While there was an admission that rates had peaked, the previous mantra of higher for longer seemed to remain firmly intact, dependent on economic data and inflation in particular. Despite this reiteration, market consensus is still pencilling in the first cut in March, although with rather less conviction than before, with the most likely timing now moving out to May.
In addition, the latest releases on the employment front implied that there is currently little need for the Fed to consider easing at present. The ADP report confirmed the addition of 164,000 jobs in December, against estimates of 115,000 and the previous month’s 103,000. In addition, 202,000 jobless claims were filed, against expectations of 216,000.
Attention will now turn to the most important jobs number of all, with the release of the non-farm payrolls report this afternoon. Here, the expectation is for 170,000 jobs to have been added in December, compared to 199,000 in November. The unemployment rate is expected to tick marginally higher to 3.8% from 3.7%, accompanied by what will become an increasing focus on any signs of a weakening economy in the face of previous Federal Reserve rate hikes.
In any event, the number will add further fuel to the debate on whether the economy is standing firm or slowing towards a soft landing which could open the door to cuts at some point.
In the meantime, and having risen by more than 43% last year, the technology-heavy Nasdaq index has borne the brunt of this week’s investor insouciance, dipping by 3.3% in the first three trading sessions. An example of air being let out of the tyres has been the performance of Apple Inc (NASDAQ:AAPL), which has fallen by more than 5% so far this week. Two broker downgrades cited concerns about weakening iPhone demand.
Other members of the “Magnificent Seven” have also fared poorly, with drops of 8.8% for Tesla Inc (NASDAQ:TSLA), 3% for market darling NVIDIA Corp (NASDAQ:NVDA) and 2.6% for Microsoft Corp (NASDAQ:MSFT) 2.6%.
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Asian markets followed the generally weak lead from Wall Street, although a weakening yen provided some support for Japanese exporters such as Toyota and Honda. This weakness has the dual benefit of making goods more affordable, as well as increasing the value of overseas earnings.
The Nikkei has of late been the focus of investor attention and delivered a strong performance in 2023, with the reported earthquake over recent days heightening the likelihood that the central bank may hold fire on any changes to its loose monetary policy for now.
UK markets picked up the bearish baton from global peers in a weak opening. After a storming finish to the end of the year, the FTSE 250 index has lost over 2% this week as the debate on interest cuts domestically gathers pace amid weakening growth.
There are also most recently conflicting economic data which have muddied the water on whether the UK is actually in recession at present and, with inflation genie not yet back in the bottle, the Bank of England remains constrained in its ability to ease policy.
The FTSE 100 is also marginally behind this week, largely in sympathy with the interest rate topic which has been dominating sentiment. There was a broad markdown in early exchanges, exacerbated by a sharp dip at Endeavour Mining (LSE:EDV) after the reported dismissal of the chief executive following “serious misconduct”.
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More positively, a glimmer of hope has been provided by the retailers and supermarkets this week on what has potentially been a strong festive trading season. In addition to the pleasing update which propelled Next (LSE:NXT) shares yesterday to a record high, updates next week from the likes of Tesco (LSE:TSCO), Sainsbury (J) (LSE:SBRY) and Marks & Spencer Group (LSE:MKS) could continue the momentum.
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