Nasdaq reflects optimism for 2024 as Fed Governors play Scrooge on early rate cuts

Last week’s ‘pivot’ rally has inspired some lofty bull market forecasts for equity markets in 2024, but a handful of Fed Governors played Scrooge by downplaying how soon and how far rates could fall. Meanwhile the Bank of Japan could raise rates tomorrow. At home, US housebuilders are getting more optimistic against the backdrop of almost a point decline in mortgage rates.

TODAY’S MAJOR NEWS

Fed officials question pace and scope of interest rate cuts

Last Friday, the Presidents of the Atlanta and New York Feds made different speeches from the Chicago Fed President, demonstrating the difference of opinion within the Committee:

Atlanta Fed President Raphael Bostic said he sees just two cuts next year, starting in Q3. “We've got to figure out definitionally what the 'neighborhood' looks like" where the inflation outlook is such that rate cuts are warranted, Bostic said. "Over the next several weeks ... I think we are going to start talking about that."

New York Fed President John Williams said it is "premature" to discuss a March. “We aren't really talking about rate cuts right now," he said in an interview with CNBC. When it comes to the question of lowering rates, "I just think it's just premature to be even thinking about that.”

Chicago Fed President Austin Goolsbee said on Sunday said the risks are becoming more balanced, implying that the Fed might need to cut interest rates to shift its focus towards the 'full employment' versus 'low inflation' element of its dual mandate.

Bank of Japan (BoJ) raising interest rates

The BOJ is not only the last of the G4 central banks to make its last 2023 policy decision tomorrow, but its higher interest rate policy is out of step with the rate cutting mood. Japanese authorities have signaled their desire to ‘normalize’ the previous long period of abnormally lower interest rates as they coped with deflation and sluggish economic growth. The impact of this policy has been a sharp rise in the Yen and underperformance by the Japanese equity market over the past two years: the former rose by 50%, for Yen/USD 100 to 150; the Nikkei 225 index rose by around 17%, lagging the bull market in other developed equity markets. It’s interesting to ponder how much of this well signaled policy tightening is now in market prices, and expectations of investors.

Housebuilders confident of a housing market recovery

Easing interest rate expectations and decline in the 30-year fixed-rate mortgage rate, to just over 7% from a peak close to 8% in October, has inspired greater confidence in housebuilders and a belief that spring will see a rebound in house prices and activity.

• US homebuilder confidence rose to 37 in December, better than expected, up from 34 last month prior according to the National Association of Homebuilders/Wells Fargo Index
• Confidence fell to the lowest since December 2022 in November
• Prospective buyers have returned to the housing market, with the NAHB’s buyer traffic index reaching a year-high of 40 in July
• Yet the index reading representing the price of new homes was unchanged at 36 in December

TODAY’S MAJOR MARKETS

Nasdaq leads markets as commentators get bullish on 2024

• Official market forecasters at the major banks are getting bullish on 2024, and specifically on tech stocks. The Nasdaq rallied 0.7% in morning trade, the S&P 500 was up 0.5%, while the Dow and Russell 2000 were unchanged
• The Nikkei 225 fell 0.6% ahead of the BOJ’s interest rate decision tomorrow, with the DAX off 0.6% and the FTSE 100 up 0.5%
• The VIX, Wall Street’s fear index, was unchanged at 12.5

Bonds yields tick up, dollar unchanged

• 10-year TIPS index-linked yields rose to 1.73% yield, but are still historically low
• 2- and 10-year yields also rose marginally, at 4.47% and 3.96% yields, respectively
• The dollar index was unchanged
• Versus the dollar, the Yen and Sterling were off 0.6% and 0.8% respectively, while the Euro rose 0.2%

Oil prices rally on Mid East news

• Oil prices rose 1.9% after news of an attack by Iranian-backed Houthis on an oil tanker in the Red Sea, as if the emphasize the regions volatility
• Gold prices held steady at $2,040 per ounce, up 0.2%, while Silver prices fell 0.4% to $24.0 per ounce
• The grain and oilseed sector was mixed despite plentiful news, while corn and wheat prices are slipping lower yet again
• Soybeans were supported by risks in Brazil weather and in Red Sea shipping of cargoes on their way to China
• Soybean meal and soybean oil found support from a move by Argentina to raise export taxes on those products from 30% up to 33% to match the tax currently on soybeans provide those headlines if they occur.

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com