Perspective: Morning Commentary for January 25

January 25 – Stock futures rallied following the release of this morning’s economic data, as the dollar initially followed Treasury yields lower. Additional optimism came from a sharply positive reaction of the Chinese stock market to the previous evening’s announced stimulus package, with the rally led by stocks of state-owned enterprises. The VIX slipped modestly lower following the data release, putting it near 13 this morning, while the dollar index traded near 103.4. Yields on 10-year Treasuries are trading near 4.13%, while yields on 2-year Treasuries are trading near 4.33%. Crude oil prices are nearly 2% higher after rallying to their highest level since December 1^st early this morning on rising geopolitical risks.

Durable goods orders were flat in December, falling short of analyst expectations of 1.0% growth, and a notable change from the 5.5% gains posted in November. But durable goods orders ex-transportation rose 0.6% month-on-month in December, which was more than triple the 0.2% gains expected by analysts, and slightly better than the 0.5% gains posted in November. Core capital goods orders, which are a good indication of business optimism, rose 0.3% month-on-month in December, versus market expectations that they would contract by 0.2%. Core capital goods orders rose 1.0% in November.

Gross domestic product grew at an annualized rate of 3.3% in the fourth quarter of 2023, down from 4.9% in the third quarter, but notably above the 2.0% growth expected by analysts. Part of that was because personal consumption expenditures came in stronger than expected at an annualized rate of 2.8% in the fourth quarter, down from 3.1% in the third quarter, but above the 2.5% growth rate expected by analysts. Both of the above data reports show resiliency by the economy. It is slowing, as expected, but it shows no signs yet of slipping into a recession. The Chicago Fed national activity index for December came in at -0.15, down slightly from 0.01 the previous month, and an indication that the economy grew at a slightly below trend pace in December.

First-time claims for unemployment benefits rose to 214K in the week ending January 20, up from a low 189K the previous week, and above analyst expectations of 200K. Yet, the four-week moving average for claims slipped to 202.25K, down from 203.75K the previous week. Continuing claims for the week ending January 13 rose by 27K to 1.833 million, although the four-week moving average dropped by 13,250 to 1.835 million. Today’s jobless numbers show an uptick in the unemployed, but it is thus far a one-week aberration at a historically low level. We’ll need to monitor this for possible additional increases in unemployment, but thus far the numbers still reflect a tight jobs market. Wall Street continues to look at the data through rose-tinted glasses – wanting to see each data point as an indication that inflation will come down, the Fed will cut rates, and the economy will rebound. Perception is reality in the markets, and for now, that’s the storyline.

China will have more room to introduce stimulus in 2024. That was the message to the markets from the governor of China’s Central Bank today. His statement showed surprising transparency as he explained that expectations of a U.S. Fed pivot toward lower interest rates will finally allow China the opportunity to be more aggressive with its stimulus efforts. Doing so without a Fed pivot would risk weakening the yuan at a time when China wants the world community to see its currency as a strong alternative to the dollar and to the euro. Ironically, the European Central Bank held the line on monetary policy today – not even hinting at a rate cut. The question then is, what if expectations of a Fed rate cut are wrong as well? That would leave China in a predicament.

WTI crude oil prices hit nearly eight-week highs early today following further escalation of geopolitical risks in the Middle East after two ships operating in the Red Sea by US subsidiaries had to turn around after coming under fire from Houthi Rebels. This also comes as Ukraine makes additional strikes on Russian oil and refinery infrastructure, and after US crude oil inventories fell more than anticipated in the latest week’s data. I’ll be watching to see if we garner follow-through strength again today in the grain and oilseed complex as well. The gains there still look to be a correction in an otherwise steady to lower market, but the sheer size of speculative shorts in those markets leaves them vulnerable to firmer dynamics if sentiment were to shift from one of commodity deflation to one of expectations of a return of inflation to our economy. I’ve been expecting such a sentiment shift mid-year, but I remain open to an earlier shift if inflation indicators start to turn higher sooner than I anticipate.