Markets Weekly podcast – 8 January 2024

Julien Lafargue (JL): Welcome to a new edition of Barclays’ weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.

Well, first of all, let me wish you a very happy and prosperous 2024. This is the first podcast of the year. So, welcome back, thank you for tuning in. And what we’re going to do today is slightly different to what we used to do in the sense that since it’s the first podcast of the year, we thought we could just look at those events that took place between the time we took a break and today, and setting up the scene for 2024.

And, as you probably have noticed if you’ve looked at your Bloomberg, the stock market has entered 2024 on the defensive. Now, it wasn’t really a single catalyst that caused that pullback but, rather, a series of factors.

So, first, we got the minutes from the FOMC meeting in December. And those were perhaps not as dovish as hoped, highlighting this growing gap between the Fed signalling and the market’s aggressive rate-cut expectation.

Just as a reminder, futures are currently pricing in a fed funds rate below 4% by the end of this year, which is some 150 basis points’ worth of cuts over the next 12 months or so.

The second main development that we saw over the last few weeks was the eurozone Flash CPI figure for December, so inflation in the eurozone. And inflation actually accelerated at the end of last year, went up from 2.4% year on year to 2.9%, although this was in line with expectations, as well as in line with the ECB’s own projection.

Conversely, core inflation, so excluding volatile elements such as food and energy, decelerated in December. It was 3.4% year over year versus a prior reading of 3.6%. However, this was still in line with expectations.

So, the reality is that there are clear reasons as to why inflation in the eurozone has picked up in December, namely base effects. But what it shows is that the road to 2%, the ECB’s target, won’t be a straight line. 

Now, the third key element was the US jobs report that came out last Friday. Again, quite a mixed report. At the headline level, the US economy added 216,000 jobs in December, that is according to the BLS establishment survey. That was higher than the Street forecast at 175,000. 

However, there were revisions to prior months, and those were negative to the tune of 70,000. In addition, and we’ve highlighted in the past the differences between those two surveys, the household survey run by the BLS showed a huge 683,000 drop in employment, so clearly a mixed picture here.

So, depending on how you look at this report, you can make it so that it’s a strong argument in favour of the soft-landing scenario, but you can also very easily twist it to support a much more cautious view on the US economy.

Now, finally, we got the manufacturing ISM in the US for December and that came in a bit ahead of expectations at 47.4, that is up from 46.7 in November, and slightly above consensus as well. However, the number, on an absolute basis, remained below 50 and, thus, is in contraction territory.

Now, if you look at the details they were mixed, but the most encouraging point was probably that the fact that price paid tumbled 4.7 points to 45.2, which would suggest that inflationary pressures are likely to recede in coming weeks.

Now, this is all well said and done, but we’re also seeing a flare up in geopolitical tensions, specifically in the Red Sea, after Houthi militants in Yemen escalated their attack in the region prompting many shipping companies, including shipping giant Maersk, to reroute ships from the Red Sea around Africa, and that for the foreseeable future.

This, of course, could have implications for global supply chains and, therefore, inflation dynamics.

Just to give you an idea, the cost to ship a 40-foot container from Shanghai to Rotterdam has jumped from around $1,000 in October to more than $3,500 today. The good news is that we are still very far from the $14,000 registered at the peak during the pandemic but, still, it’s a sizeable increase nonetheless and something that we will, as well as I’m sure most central bankers, will be monitoring in the coming weeks.

Now, in terms of the message from us to investors, I think it’s fair to say that it’s been a quite noisy and fairly busy beginning of the year. But, given the run-up we saw in November and December, it appears legitimate to see markets consolidate for a while. Investors’ expectation of a rapid pivot from central banks may be challenged in the weeks ahead as base effects and the still resilient global, but mainly US, economy keeps inflation elevated.

And that will likely bring another and possibly last opportunity to lock in yields and extend duration, something that we discussed a lot at the end of last year and in our “Outlook 2024”.

So, really, the picture hasn’t really changed on our side. We maintain the view that volatility is going to be elevated in 2024, that it is time for investors to consider, as I just mentioned, locking in yields and extending duration whenever possible. 

And, on the equities side, we maintain the view that being somewhat defensive, looking at bond proxy sectors, is probably the best course of action at this point in time. The overarching theme, as always, is that we want to be invested, but we want to be pretty well diversified in the current context.

Now, in terms of what to look for in the week ahead, the focus will be again on inflation. We’re going to get the Tokyo CPI, very important given what’s happening at the BoJ at the moment. That will come out on Tuesday. And then we will have the US CPI data for December. That will come on Thursday and could give an indication as to whether the market is right to think that the Fed could start cutting rates as early as March this year.

Other things to note, we’re going to get the final GOP primary debate on Wednesday, and a very important election will take place on Saturday in Taiwan.

So, it’s new year but still plenty of things to discuss next week and a lot happening around the world. It’s not necessarily going to be an easier year for investors, but we will be here to try and make sense of everything that is happening in the world.

So, we will be back next week with a guest speaker as usual but, in the meantime, as always, let me wish you all the success in the trading week ahead.