January 4 – The excitement of late 2023 has not carried over into 2024, as traders note elevated geopolitical risks that raise energy prices, the dollar rallies on a resurgent strength in Treasury yields, and the minutes of the December Federal Reserve meeting provide little fresh fodder to support lower rates. Rather, the VIX is trading back above 14 this morning as stock futures struggle to sustain gains, following jobs data that reflects a solid economy. The dollar index is trading near 102.5 in early trade. Yields on 10-year Treasuries are trading near 3.98%, while yields on 2-year Treasuries are trading near 4.38%. Crude oil prices are another 1% higher on escalating tensions in the Middle East. However, the grain and oilseed complex remains in the doldrums, with ample supplies and headwinds from a strong dollar.
Mounting debt remains a challenge for China’s recovery. China’s property developers are estimated to hold 737.3 billion yuan ($103 billion) of offshore and onshore bonds due this year, according to Fitch, up 11% from 2023. That means rising repayment pressure for developers at a time when property sales are expected to slow down with further pressures on prices. Support from the government may be limited, as the local governments themselves also bear heavy debt burdens. China’s local government-backed companies borrowed aggressively in the previous years on behalf of provinces and cities to finance mainly infrastructure projects, such as roads and ports. According to a Bloomberg estimate, China’s local government will have to pay back 4.65 trillion yuan ($651 billion) worth of bonds due over the next 12 months, up 13% on the year. A lack of sign of recovery in property sales will test China’s ability to contain financial risks as mounting debts come due this year.
The U.S. Challenger Job-Cut report revealed December corporate announcements of plans to lay off 34,817 people in the future, down from 44,510 in the previous month. That’s a relatively low number, which fits with other recent data indicating that employers may be slowing hiring, but they’re also working to hang onto employees as well. Those number then fit with the weekly jobless claim numbers that were also released this morning.
First-time claims for unemployment benefits fell to 202K in the week ending December 30, down from 220K the previous week, and well below analyst expectations of 217.5K. This dropped the four-week moving average to 207.75K claims, down from 212.5 the previous week. Again, these are low numbers, suggesting that people are keeping their jobs – we’re not seeing any mass layoffs in the economy that you’d expect to see if the economy is slowing. Continuing claims for the week ending December 23 fell to 1.855 million, down 31K on the week. The four-week moving average for continuing claims dipped slightly to 1.867 million. Again, these numbers do not reflect a weakening jobs market that would support easing wage inflation pressures.
Finally, this morning’s ADP monthly employment report showed that the private sector added a solid 164K jobs in December, up from 101K the previous week, and well above analyst expectations of 115K. Friday’s government employment report will carry more weight, and the correlation between that report and this one is not always as strong as we’d like it to be. However, this morning’s ADP report also fits with the recent trend of a solid jobs sector.
The minutes of the December meeting of the Federal Open Market Committee were a disappointment to Wall Street traders, as I expected them to be. The minutes did indeed show that committee members are hearing the complaints, that they believe that current policy is bringing inflation under control, and that they therefore also have increased concerns about what further tightening might do to harm the economy. But they also provided little indication that the members of the monetary policy committee have any immediate plans to cut rates. The minutes did reflect some interest in discussing the Feds plans for stopping its reduction of the balance sheet, and that’s not a surprise to me considering the rapid increase in debt certificates being offered to the market due to the current pace of fiscal spending. Yet, there was no significant shift in sentiment yet in that direction, nor was there a noted tone toward cutting rates. The market had already priced in the first 25 basis points of cuts for the March meeting, with at least 150 basis points in cuts by December. The minutes did nothing to support those positions.
The above does little to change the mood in the broader commodity sector, with the exception of energy prices that get a modest boost from geopolitical risks in the Middle East. Ukraine exported 7.18 million metric tons of grain in December, despite all of its challenges, on top of the large quantities of cheap wheat still coming out of Russia – albeit reduced somewhat due to weather problems at ports in December. Rains continue to fall in previously dry areas of Brazil, reducing areas of its soybean belt under stress down to just 15 – 20% of the region. A drier trend returns for the 6- to 15-day period, which could rebuild stress for late-planted soybeans. Meanwhile, weather in Argentina remains quite conducive for crop development.
