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Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ which provides a brief analysis of the key factors currently affecting global markets. Received this morning – 05/12/2023

What has happened?

Monday saw some reversal in the market’s dovish pivot with the highly rate sensitive 2-year Treasury yield rising by almost 10bps on the day. A softer day for bond markets should be read within the context of the extremely strong rally during November and we have, for context, seen similar reversals as recently as Thursday last week. The US equity market suffered under this bond market move however, with the headline index down just over half a percent while technology underperformed, led by the Magnificent 7 mega cap tech stocks.

Bond market moves

 There was no specific catalyst for the weaker bond market, it likely represents another pause for breath after dizzying recent downward momentum in bond yields. This week sees a series of important data releases which will add or detract from the probability of a soft landing. Next week contains the Federal Reserve meeting which will see the release of the ‘dot plot’ of interest rate expectations. The dot plot will reveal the gap between the market and the Fed in regards to interest rate cuts in 2024. After previous pivots the Fed has delivered a ‘hawkish rebuke’ of the bond market’s pricing, whether the Fed determines the inflation backdrop warrants a similar pushback will govern market sentiment for December.

 Economic data

 Today sees the release of the ISM services index which will be an important barometer of US economic health after the manufacturing equivalent was poorer than expected. The JOLTS report will also be a focus of the market, in part due to the proximity of the US employment report on Friday but also due to the ratio of job openings to layoffs remaining at tight levels. In September there were 1.5 job vacancies for each unemployed person, this compares to 1.2 before the pandemic, so jobs remain plentiful.

 What does Brooks Macdonald think?

 Early this morning, the release of the Tokyo inflation rate surprised to the downside, with headline inflation rising by just 2.6% year-on-year compared to 3% expected. Core CPI also came in one tenth of a percentage point below economist expectations. The Bank of Japan is expected to remove its yield curve control policy, effectively a form of quantitative easing, in coming months however this exit may be pushed back if inflation starts to cool of its own accord.

Please continue to check our blog content for the latest markets and economic updates from leading investment houses.

Alex Kitteringham

5th December 2023