If we look at the first trading day of the year in the United States, financial markets will start 2024 with a more cautious start than we will see in 2023. This may be because the first big test of the year will come in Friday’s non-farm payrolls data. The U.S. job market has maintained a certain level of prosperity in 2023, and if there are any surprises in December’s employment data, it will test the market’s expectations for overly dovish Federal Open Market Committee (FOMC) policy in 2024.
On the other hand, if employment is low, this could kick-start the upward momentum in risk assets again. Therefore, before the end of the week, the key will be the employment data and the FOMC minutes. People remain cautious on this issue as there is still a gap between the market and the Fed’s expectations for the level of interest rates in 2024.
The US dollar suffered a heavy sell-off in the fourth quarter of 2023, but at the start of the new year, the US dollar recovered in a more positive trajectory as bond yields rose. The U.S. Dollar Index (DXY) has fallen 2% over the past year, with most of the decline occurring in the last two months of the year, as the market’s focus shifted to anticipating rate cuts rather than further hikes. Although DXY comfortably held the 106 mark in early November, by the end of December, the index was in contention to stay above 100. At the beginning of 2024, the 10-year bond yield has recovered to around 3.95%, and the dollar index has accordingly broken through the level of 102. Whether the dollar is able to continue its pullback will depend on how bond yields react to key jobs data this Friday.
Even as bond yields and the dollar move higher, gold remains elevated. The precious metal has barely pulled back, with spot prices still hovering around $2,060 (Wednesday in early Asian trading). For now, it appears that the rising Treasury yields have so far been unaffected by safe-haven purchases. Gold has outperformed 2023 (up 13% for the year) and the outlook for 2024 looks positive, provided that the current expectation of a dovish Fed rate bias continues. This quarter’s US macro data and its impact on the outlook for interest rates will determine whether gold will be able to hit the $2,100 mark again in the near term.
Crude oil prices are still being affected by the latest Red Sea shipping incident. However, it was preceded by another attack that, although the escalating situation did not ease, prices dropped and Maersk Line once again suspended routes in the region. Tensions and potential supply disruptions remain, but the risk premium has disappeared from oil prices. The market seems reluctant to buy oil prices at this time, after a nearly 11% drop in oil prices last year. The volatility of the energy market is a feature of 2023, and the market has so far been cautious about the start of 2024, given the ongoing conflicts taking place near many major oil producers.