The new year has continued in the same mode as previous weeks and months. That means more dollar strength, with six straight week of gains, and bulls fuelled further by a sizzling NFP report. That comes on top of the incoming new President and his potentially inflationary cocktail of policies. Bond markets are grabbing the attention currently, with yields marching higher. The proxy for global borrowing costs, the 10-year US Treasury yield, has made fresh cycle highs above last year’s top at 4.73% – are we inevitably heading towards 5%?
In the near-term, much may depend on this week’s US inflation data. An upside surprise in these figures could be challenging for bonds and really light the touch paper for yields to spike higher. Of course, that should take the dollar with it and stocks in turn would suffer as rate cut bets get increasingly priced out for the whole of 2025. Last week’s US jobs report had already ramped up the chances of an extended pause by the Fed, with money markets not seeing another reduction until September.
The fourth quarter earnings season begins this Wednesday with the usual heavyweight banks like JP Morgan, Wells Fargo and Citigroup kicking off quarterly and full year results. Equity markets closed near their lows last week which is not a positive sign. We also noted price action around market leader, Nvidia, which unveiled what appeared to be very upbeat news about new chips. The stock traded up briefly before selling off sharply. The $150 zone looks like strong resistance while the good news / bad price behaviour is typical of what happens at the highs in overstretched sectors. With market breadth once more highly concentrated, this level is worth keeping an eye on.
The UK has recently been in the spotlight as its bond markets have caved in to fiscal and inflationary risks. This has put the government and its chancellor in a tough spot with a decision on whether to raise taxes or cut spending likely needed soon. Sterling has been hit with GBP/USD falling to a one-year low below 1.23. Wednesday’s inflation data is expected to remain sticky. Along with flatlining growth and the worsening fiscal outlook, it is a toxic mix for sterling, which should be benefitting from rising yields.