Stocks and bonds kicked off the year underwater, with the S&P 500 snapping a nine-week winning streak and pencilling in what many technical analysts would refer to as a weekly Evening Star candlestick formation: a bearish cue. The Dollar Index ended the week higher, its first weekly gain in three weeks, with spot gold (XAU/USD) fading familiar weekly resistance at $2,075.

Rear-View Mirror: NFP and US ISM Services

The first week of trading concluded with the widely anticipated US Employment Situation Report and the US ISM Services PMI for December 2023.

Non-farm payrolls revealed that the US economy added 216,000 new payrolls in the month of December. This is solid job growth, surpassing November’s downwardly revised print of 173,000 and nearing the upper boundary of Bloomberg’s estimate range (235,000); Bloomberg’s median estimate was also comfortably bettered at 175,000. US unemployment remained unchanged at 3.7%, defying expectations of an uptick to 3.8%, while year-on-year wages increased by 4.1% in December against a 3.9% median consensus and the 4.0% prior reading in November. Investors pared Fed rate-cut bets to just south of 130bps for the year following the release, down from 135bps, with a 25bp rate cut in March fixed at about 50/50. May remains fully priced in for a 25bp cut, according to market pricing. Alongside US yields, the Dollar Index spiked north of the 103.00 level in the immediate aftermath, and US equity index futures dipped southbound.

However, the aforesaid moves were short-lived; attention was directed to the downward revisions and softer-than-expected US ISM Services PMI, falling to 50.6 in December from 52.7 in November. The week’s end, therefore, observed Fed rate cut pricing increase back to around 140bps. Of relevance out of the ISM report was the employment sub-index dropping into contractionary territory to 43.3, down from 50.7. Anthony Nieves, Chair of the Institute for Supply Management Services Business Survey Committee, commented: ‘The services sector had a pullback in the rate of growth in December, attributed to the decrease in the rate of growth for new orders and contraction in employment. Respondents’ comments vary by both company and industry. There are concerns related to economic uncertainty, geopolitical events and labor constraints’.

First Full Trading Week Ahead

The first full week of the year will be absorbed by CPI inflation data from several countries, including out of the US on Thursday at 1:30 pm GMT, which, for many market participants, will be the dominant macro driver this week.

The year-on-year median estimate for US headline CPI inflation is anticipated to slightly tick higher to 3.2% in December, up from 3.1% in November (estimate range between 3.3% and 3.0%), while the core measure, which excludes food and energy, is set to ease under 4.0% for the same period, its lowest level since early 2021. Slowing inflationary pressures this week would help add evidence to the Fed’s case to begin cutting in the first half of this year and perhaps tip the scales in favour of a March cut (doubtful as of writing). A resurgence in price pressures, however, could have rate-cut projections nudged further out in 2024. If inflation pressures begin to gather steam, options for the Fed would be few and far between aside from leaving the Fed Funds target range in restricted territory, a move that could bolster the buck and pressure stocks.

Additional inflation numbers to keep an eyeball on this week are from Switzerland, Australia and China. Following cooler CPI inflation in November (1.4%), Swiss inflation—first out the gate this week on Monday at 7:30 am GMT—is expected to increase by 1.7% in the twelve months to December (estimate range falls in between 1.8% and 1.5%). Aussie CPI inflation will be welcomed on Wednesday at 12:30 am GMT for the month of November. Year on year, economists estimate that consumer prices will slow to 4.5% from 4.9% in October. Finally, inflation numbers from China will be released on Friday at 1:30 am GMT. The market consensus suggests inflation is expected to continue to fall to -0.7% on a year-on-year basis in December, down from -0.5% in November.

Another macro release to monitor this week is Friday’s growth data out of the UK. Following the UK economy shrinking by -0.3% in October 2023 (following growth of 0.2% in September), economists anticipate that November’s print will have increased by a meagre 0.1% on the month.

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