Like many occurrences last year, a new month brings a change in market sentiment. January started with
robust employment data that was backed up by inflation data failing to revert quickly enough to justify the
7 cuts priced in for 2024. When the monthly Fed meeting was non-committal, followed by push back from
many Fed governors, the market finally got the hint, reducing those cuts and debating delaying the start of
the expected cycle from March to May or June.
The frustrating pattern of last year continues, whereby robust data in jobs and consumer demand refutes the narrative of financial conditions being too tight. The only story to shine light on stress in the system was the NY Community Bancorp, in announcing a requirement for greater reserves as they had broken the $100bn threshold and had increased provisions against CRE. This was interpreted by the market (incorrectly?) as another credit event and yields reversed rapidly into month end. The same stickiness in underlying core inflation is being experienced in much of G10, making the path to a 2% target a hard road to justify rapid cuts. Over the month both ECB and BoE rate cut expectations were reduced dramatically too. The RBNZ pushed out the idea of further hikes in 2024 as large positive immigration has boosted demand in many sectors of the economy.
The US 10y closed the month 3bps higher and 5s-30s swap was 8bps steeper.
