“US Economy Lands Softly as Markets Rally in 2023”

Tuesday saw the major market averages trade in a mixed fashion, with the Nasdaq Composite (COMP.IND) falling by 1.8%, the S&P 500 (SP500) declining by 0.7%, and the Dow (DJI) retreating by 0.1%. However, U.S. Treasury yields marched higher, with the 10-year Treasury yield (US10Y) rising 7 basis points to 3.93% and the 2-year yield (US2Y) increasing 7 basis points to 4.32%.

UBS economist Paul Donovan suggested that the last month of 2023 marked an equity and bond rally. This increase in market performance was not due to a significant shift in the economic outlook, but it was rather the result of a change in language from Federal Reserve Chairman Powell. This change in tone was interpreted differently by investors, and other Federal Reserve members who attempted to soften Powell’s response received little attention.

The Main Economic Story of 2024: Slowing Inflation

Donovan stated that the main economic story for 2024 is the continuing decline of inflation. Pay increases for workers will help create an economic cushion in the coming year. However, central banks will only be able to claim a relatively small amount of credit for the reduction of this economic indicator.

The decrease in durable good inflation occurred automatically, and the dip in energy inflation is seen more as a result of the supply situation. Additionally, consumer resistance is causing profit-led inflation to reach its end. Understanding this, it is being suggested that higher interest rates can reduce inflation further as the process slows credit access and increases unemployment – effects of interest rate increases have not been overly dramatic thus far.

US Data for December

According to December’s data, the U.S. Purchasing Managers’ Index (PMI) for Manufacturing came in lower than expectations at 47.9 versus the forecasted 48.2. Notably, November’s Construction Spending figures showed that the amount increased by 0.4% M/M to $2,050.1B, surpassing the initially anticipated rise of 0.5%.

“Markets Rally While Inflation Rates Fall: Economic Outlook for 2024”

Tuesday saw market activity remain in a mixed state, with the Nasdaq Composite (COMP.IND) declining by 1.8%, the S&P 500 (SP500) decreasing by 0.7%, and the Dow (DJI) retracting by 0.1%. In addition, U.S. Treasury yields went up, with the 10-year Treasury yield (US10Y) climbing 7 basis points to 3.93% and the 2-year yield (US2Y) rising 7 basis points to 4.32%.

UBS economist Paul Donovan highlighted that 2023 was a positive month for both equity and bond markets, although the shift in economic outlook did not play a role. He instead attributed the increase to a change in language from Federal Reserve Chairman Powell, which investors interpreted differently and obliged.

A Slowdown on Inflation: 2024’s Main Economic Story

Donovan suggested that the main economic trend for 2024 will be a continuation in inflation’s downward path. Workers may be benefitting from higher wages, which will soften the economic implications of this situation. Nevertheless, he explained that central banks will have only a minor part in claiming credit for this decrease.

November’s durable goods inflation stopped on its own, whereas energy inflation is thought to be a result of an imbalance in supply. Furthermore, profit-led inflation is falling fast in the wake of consumers refusing to comply. With that in mind, higher rates could bring inflation closer to its end, yet the effects of doing so have been mild.

December’s U.S. Data Reviewed

Data reported for December showed a PMI Manufacturing Index of 47.9, missing the 48.2 consensus level. November Construction Spending, however, rose by 0.4% M/M to $2,050.1B in contrast to the expected +0.5%.