Japan Unemployment Rate Falls To 2.4%

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Economic

Summary:

Japan unemployment rate drops to its lowest point since January.

In December, Japan's labor market continued to exhibit signs of tightness, attributed to a shortage of manpower across various sectors. This development is closely monitored as companies engage in annual wage negotiations with unions.

The Ministry of Internal Affairs reported on Tuesday that the unemployment rate dropped to 2.4%, marking its lowest point since January. The number of employed individuals increased by 380,000 compared to the previous year, marking the 17th consecutive monthly rise. Notably, industries such as manufacturing, lodging, and food services played a significant role in driving this employment growth.

Despite a slight weakening in a separate measure of labor demand, the overall labor market remains exceptionally tight. The job-to-applicants ratio decreased marginally from 1.28 to 1.27, falling short of economists' expectations for the gauge to remain unchanged, as reported by the labor ministry.

The Bank of Japan is closely monitoring the labor market as it seeks indications of a positive cycle linking increasing wages with demand-driven price growth. In its quarterly outlook released last week, the BOJ mentioned that "the rate of increase in scheduled cash earnings is likely to continue strengthening, influenced by price hikes and with ongoing tightness in labor market conditions."

The central bank anticipates a moderate increase in other cash earnings, reflecting a recovery in economic activity. If authorities determine that the positive cycle is in progress, it could lead to Japan's first interest rate hike since 2007, thereby ending the world's last negative interest rate policy.

Shuji Tonouchi, senior economist at Mitsubishi UFJ Morgan Stanley, emphasized, "With the expectation that the labor shortage will persist in the near future, companies strongly feel the imperative to secure human resources. I anticipate that more companies will be inclined to raise wages in the upcoming pay negotiations or increase salaries more than they did last year."

Prime Minister Fumio Kishida is set to advocate for higher wages in a speech to parliament on Tuesday, as reported by Kyodo News. The historic wage gains from the previous year failed to keep pace with inflation, intensifying pressure on household budgets.

BOJ Governor Kazuo Ueda, in a press conference following last week's decision to maintain the current stance, stated that he will meticulously assess economic data, including the outcomes of the pay negotiations. This evaluation is part of the ongoing progression toward a policy normalization, widely anticipated by most economists to take place by April.

To stay updated on all economic events of today, please check out our Economic calendar

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FastBull Featured

Daily News

[Quick Facts]

1. Japan's job market remains tight, keeping hopes for wage gains.

2. Pentagon says U.S. is not seeking a war with Iran, but it will take action.

3. U.S. Treasury Department cuts Q1 borrowing estimate.

4. Oil retreats as traders have digested escalating tensions in the Middle East.

5. OPEC+ exports indicate a slow start to its new oil output cuts.

6. ECB dovish signals increase the likelihood of an April rate cut.

7. Kazimir says June is more likely than April for the first ECB cut.

[News Details]

Japan's job market remains tight, keeping hopes for wage gains

Japan's labor market showed further signs of tightness in December driven by worker shortages in several industries. This development is being closely watched as companies and labor unions begin annual wage negotiations. The unemployment rate fell to 2.4% in December, the lowest since January last year, while the jobs-to-applicants ratio slipped to 1.27 from 1.28, which was lower than the market expected.

In its quarterly outlook last week, the Bank of Japan said that "the rate of increase in scheduled cash earnings (wages) is likely to keep rising firmly, reflecting rising prices and continued tight labor market conditions."

The labor market is expected to continue tightening gradually. Manufacturers are likely to continue hiring actively and other firms in the retail and service sectors will also add jobs as slowing inflation spurs consumer demand.

Pentagon says U.S. is not seeking a war with Iran, but it will take action

A day after militant groups killed three U.S. soldiers and wounded dozens more, the U.S. Department of Defense said it doesn't believe Iran is seeking war with the United States and the U.S. does not want to launch a war either, according to the Times of Israel.

Sabrina Singh, a spokeswoman for the U.S. Department of Defense, accused Iran of supporting groups that attack the United States. She said that the recent attack bore the "fingerprints" of the Iran-backed Kataib Hezbollah. "We don't seek war, but we will take action and respond to attacks on our forces," Singh said.

U.S. Treasury Department cuts Q1 borrowing estimate

The U.S. Treasury Department lowered its estimate of the size of net borrowing from January through March to $760 billion from the $816 billion it announced at the end of October. The Treasury Department said in a statement that the decline in borrowing demand stems from an upward revision of the forecast for fiscal net inflows, as well as a higher-than-expected size of cash on hand at the beginning of the quarter. Many Wall Street strategists had previously expected a slight upward revision to the borrowing estimate, in part because the fiscal deficit has widened in recent months.

Oil retreats as traders have digested escalating tensions in the Middle East

Oil prices gave back earlier gains as traders digested the impact of two attacks in the Middle East. Brent crude prices once rose 1.5% in Asian trading on Monday impacted by the death of U.S. troops in Jordan and the attack on a Trafigura tanker in the Red Sea, though they retreated some gains later. Last Friday, crude closed at its highest level since early November.

With the escalation in tensions over the weekend, the biggest uncertainty remains. How the U.S. will respond deserves attention. As the tensions in the Middle East intensified, Brent crude once climbed about 8% this month, but it is still well below the levels seen in October, shortly after Hamas attacked Israel. Strong supply from non-OPEC producers and the prospect of slower demand growth have helped keep oil prices in check. While attacks in the Red Sea have rerouted some cargoes and increased freight costs, they have not yet led to shortages or affected production.

OPEC+ exports indicate a slow start to its new oil output cuts

OPEC+ appears to be making slow progress on its new oil output cuts. Key coalition members have pledged to reduce supply by a further 900,000 barrels per day this month, but so far, total exports for January have remained largely unchanged.

The new OPEC+ production quotas have little actual impact on the oil market. Although the actual production data due later this week may tell a different story, current export data has done little to bolster fragile sentiment in world oil markets.

OPEC+ will meet online on Thursday. Participants have said they will not make any changes to the current agreement at the meeting. The current agreement will last until the end of the quarter.

ECB dovish signals increase the likelihood of an April rate cut

Eurozone traders believe the base scenario is that the European Central Bank (ECB) will cut rates in April. Dovish remarks from some ECB officials have increased such an expectation. Swap rates show a nearly 98% probability of a rate cut in April, rising from the 87% forecast at the end of last week.

The rise in expectations comes after ECB Governing Council member Villeroy said that regarding the exact date, not one is excluded, and everything will be open at our next meetings.

This was further supported by ECB Vice-President Guindos. He said that monetary policy will reflect the good news regarding the evolution of inflation.

The wording contrasts with ECB President Christine Lagarde's remarks last Thursday. Lagarde reaffirmed her remarks that borrowing costs could be lowered from the summer.

Kazimir says June is more likely than April for the first ECB cut

Acting hastily based on short-term surprises without having more clarity about the medium term would be risky, said Peter Kazimir, a member of the ECB governing council and the governor of the National Bank of Slovakia, in a speech on Monday. It could easily derail the progress we have made toward reaching our target (suggesting there is no rush to cut rates).

It is more likely that the ECB will cut rates in June than in April, but I would not jump to premature conclusions about the timing. We will not hesitate to act whenever necessary.

ECB officials will make their decision on upcoming data and the ECB's economic forecasts in March. The wage agreement for the next few years remains an "unpredictable factor". We don't have enough information to make a confident conclusion. For this reason, it is too early to discuss the timing of a rate cut.

[Focus of the Day]

UTC+8 17:00 ECB Governing Council Member Vujcic Speaks

UTC+8 18:00 Eurozone GDP (Q4)

UTC+8 22:00 U.S. JOLTS Job Openings (Dec)

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Owen Li

Political

How the Border Could Cost Biden the Election_1

Donald trump's mother came from Tong (population 500), a remote Scottish settlement that was once in Viking territory. His grandfather came from Kallstadt (population 1,200), a Bavarian village that produced the Heinz family. Joe Biden's ancestors came from Ireland and England. In America everyone is from somewhere else—even Native Americans, though they have been there much longer than anyone. Such is the country's appeal that 160m adults around the world say they would move there, too, if only they had the chance. That is many millions more than most Americans are willing to allow in.

This mismatch is at the heart of the issue that could cost President Biden the election. In 2016 Mr Trump rode “border chaos” all the way to the Republican nomination and then on to the presidency. At the time, he campaigned as if record numbers of migrants were coming across the border illegally. That was not true then, but it is now.

There were nearly 250,000 attempts to cross the southern border in November alone. Most of the newcomers will have sought asylum and been released into America to wait years for their claims to be adjudicated. Since Mr Biden became president, over 3.1m border-crossers have been admitted. That is more than the population of Chicago. At least a further 1.7m have come in undetected or overstayed their visas. Republican governors have paid for migrants to go to places run by Democrats, forcing the problems of the southern border northward. Their experience helps explain why voters trust Republicans to deal with border security by a margin of 30 points. It is the party's biggest lead on any issue.

This is not all Mr Biden's fault. When America's labour market is tight the incentive for people to head there illegally increases. That is why the numbers went up under Mr Trump too, until covid-19 came along and fixed the problem for him. When travel became possible again in 2021, pent-up demand resulted in a surge of people across the southern border. More than half of border-crossers are from countries beyond Mexico and the northern bit of Central America. Venezuelans make up the biggest part of this group. But tens of thousands now fly into the Americas from Russia (43,000 in the year to September 2023), India (42,000) and China (24,000) and then attempt a crossing. Often it is impossible to return them. China will not take back its nationals if their applications are rejected.

However, some of the blame lies squarely at Mr Biden's door. Mr Trump's language about Mexico sending rapists across the border and his cruel separation of children from their parents as a deterrent, along with his plan to build the wall, radicalised some Democratic policymakers on immigration. They thought public opinion was on their side. Voters did indeed revolt against Trumpism and while he was in office support for immigration reached a new high. When the new Democratic administration took power its instinct was to do the opposite of whatever Mr Trump had. Work on the border wall stopped. Democrats ditched the remain-in-Mexico policy, which obliged asylum-seekers to stay south of the border until the authorities decided on their applications. Predictably, illegal immigration surged.

Listen to this story. Enjoy more audio and podcasts on iOS or Android.

Since the midterms in 2022, Mr Biden has quietly adopted some of Mr Trump's policies. He has agreed to fill gaps in the wall. Asylum-seekers who try to cross undetected will, with a few exceptions, automatically have their applications rejected. They must apply online before showing up. Yet Americans are unaware of these efforts, partly because Mr Biden is loth to draw attention to his triangulation, lest his own side turns on him.

The president's room to do one thing while saying another is running out. The House of Representatives has paired a stringent immigration bill with funding for Ukraine's war. The administration resents this, because support for Ukraine makes economic and strategic sense for America regardless of the country's policy on immigration. That is an error. Instead, in a system in which both parties use the leverage available to them, Mr Biden should see this as an opportunity.

Some of the Republican demands on immigration are sensible. Most migrants without visas who cross at the southern border do not crawl through the desert. They find a Border Patrol agent and present an asylum claim. They must then pass what is called a “credible fear” interview. Republicans want to raise the threshold for what counts as credible fear. That is a reasonable aim. Under Mr Biden's rules, a fear of gang violence counts as a ground for being let in. Contrast that with Spain, which rejects this test even though it has a socialist prime minister.

Once that first test is passed, immigrants are typically released awaiting a court date years in the future, because immigration courts are overstuffed with cases. The average wait for a hearing is over four years. Appeals can add to the delay. Democrats would like money to hire more officers to process claims and more judges to speed through the backlog of cases. That is reasonable, too.

There ought to be a deal here. Yet each party mistrusts the other's motives. Republicans say they will not give more money to an administration they cannot trust to enforce immigration laws. Instead they are trying to impeach the secretary of homeland security. Democrats look at Republican demands, such as that families coming into the country can be detained indefinitely, and conclude that negotiations are being set up to fail and are therefore really a weapon against Mr Biden. The odds are that both parties will choose campaigning over dealmaking.

Don't forget the multitudes

That should worry Mr Biden. Our reporting from the Mexican side of the border suggests that, if people believe Mr Trump will win, many more will try to cross into America before he is inaugurated. Insecure borders weaken support for legal immigration and boost restrictionist parties. Immigration could bring Mr Trump back to the White House, from where he might pull America out of the refugee convention of 1951, causing it to collapse. Mr Biden should call the Republicans' bluff, roll up his sleeves and set out to fix the border. That would be the right thing to do. It would also help his prospects.

Source: Economist

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JPMorgan

Economic

Political

Despite geopolitical risks and hard landing fears, 2023 was an excellent year for most global markets. The MSCI All Country World ex-U.S. Index returned 16.2%, with outperformance from the Eurozone +23%, Japan +21%, and EM ex-China +20% (in USD terms). 2024 will be a unique year as 40% of the world’s population goes to the polls. Apart from the U.S., other elections this year include Taiwan, India, and Mexico. The reaction to Taiwan’s election is key to monitor to gauge the volume of geopolitical tensions. Still, Taiwanese equities have returned 8% annually on average during the incumbent DPP party’s tenure. In India, PM Modi and the BJP party will likely be reelected, continuing the positive reform momentum in India. Lastly, the election in Mexico is likely to bring continuity for the ruling Morena party. While elections can drive short-term volatility, they typically do not have long-lasting market impacts. International equities are likely to benefit this year from positive structural changes, a weaker dollar, and exciting governance changes.

Positive drivers for international markets include:

Narrowing growth differentials: Growth differentials between the U.S. and other countries are set to narrow this year as the U.S. economy grows a little bit less, Japan and EM excluding China deliver positive growth, and the Eurozone and China bottom out.

End of low inflation and negative interest rates: The return of inflation and positive interest rates in Europe and Japan is a significant contrast to the 2010s. Higher inflation also leads to better revenue growth and higher wages, which can boost consumption. The chart below shows how the change in interest rate environment is a game changer for international performance. During periods when U.S. 10-year yields were between 3-5%, intl. either kept pace or outperformed the U.S. given the value style’s dominance in these markets. Excluding Japan’s “lost decade” in the 1990s would show strong outperformance in periods when yields were over 4%.

Weaker U.S. dollar: Shrinking growth and interest rate differentials means the U.S. dollar should continue its decline that started after its peak in October 2022. U.S. dollar-based investors that invest unhedged would see an additional boost to returns. Mexico finished 2023 up 42% in USD terms with 40% of the return attributable to the dollar weakening against the peso. In addition, emerging markets tend to do particularly well in weaker U.S. dollar environments.

Governance changes: Currently, 27% of Japanese companies have a price-to-book ratio below 1x along with 19% of European companies and only 3% of U.S. companies. Historically, this has occurred due to a low focus on shareholders, but this is quickly changing. Exchanges in Japan have implemented corporate governance reforms, which has boosted the number of share buybacks and independent board members.

While headlines this year are likely to be dominated by elections, investors should focus on positive tailwinds to international markets. Foreign Large Blend was the Morningstar category with the fifth highest inflows last year, suggesting investors are taking notice, but deep underweights likely still exist in many portfolios.

International performance relative to the U.S. during different interest rate environments

U.S. 10-year, annualized avg. total return, USD, 1988-presentSource: FactSet, MSCI, Standard & Poor's, J.P. Morgan Asset Management. Intl. dev. = MSCI EAFE Index, EM = MSCI Emerging Markets Index, U.S. = S&P 500 Index. Data are as of January 18, 2024.

To stay updated on all economic events of today, please check out our Economic calendar

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Kevin Du

Central Bank

Economic

The Federal Reserve is widely expected to hold interest rates steady this Wednesday at its first policy meeting of 2024. But investors will be looking for any clues about when cuts could begin.

Will it be March, May, or later? Markets may not get a clear answer. But Fed followers do expect central bank chair Jay Powell to begin preparing investors for an eventual loosening, even if he doesn't specify timing.

"This is the slow turning of the battleship of guidance where they slowly start to talk about rate cuts," said Luke Tilley, chief economist for Wilmington Trust.

Investors began 2024 with a high degree of conviction that March was the time when the central bank would begin loosening monetary policy after the most aggressive campaign to cool inflation since the 1980s. Rates are currently at a 22-year high.

But traders began recalibrating that prediction following pushback from several central bank officials who pumped the brakes on market expectations for cuts in the first quarter of 2024.

The Fed Will Likely Hold Rates Steady This Week. Markets Want to Know When Rate Cuts Will Start._1

The market probabilities of a rate cut in March have dropped to roughly 46%, per the CME FedWatch Tool. That's down from as much as a 71% chance seen more than a month ago. The odds of a cut in May are roughly 51%.

Traders are also starting to revise downward their prediction of six rate cuts in 2024, which is twice as many as the median projection provided by all Fed officials in December. The bet now is that five cuts will happen instead.

A 'topic of discussion'

These aggressive market predictions first ramped up in December when Powell used a press conference following the Fed's last policy meeting to note that central bank officials had started the conversation of when to dial back policy restraints, calling it a "topic of discussion" and "a topic for us looking ahead."

Falling inflation also encouraged these bets as key measures moved closer to the Fed's target of 2%.

One such measure appeared last week as the Fed's preferred inflation measure — a "core" Personal Consumption Expenditures index that excludes volatile food and energy prices — clocked in at 2.9% for the month of December. That marked the first time the gauge was below 3% since March 2021.

What was even more encouraging was that the core PCE inflation rate fell to 1.5% on a three-month annualized basis, its lowest since late 2020. On a six-month basis, it was 1.9% for the second month in a row.

The Fed Will Likely Hold Rates Steady This Week. Markets Want to Know When Rate Cuts Will Start._2

Goldman Sachs chief economist Jan Hatzius forecast that the Fed will most likely start cutting in March, citing Powell's statement from his Dec. 13 press conference that the committee would want to cut "well before" inflation fell to 2%.

Hatzius also expects five cuts this year, in line with current market predictions.

But Wilmer Stith, bond fund manager for Wilmington Trust, said he thinks Powell will try to walk back the number of rate cuts priced in by the market.

"He doesn't have to walk it back that much, but he wants [expectations] to be in the center so he can have room to move in either direction without causing as much of a disruption as if he was on one side or the other," said Stith. "That way, if something happens, he's neither that dovish nor that hawkish. He can pivot and address that."

Tilley of Wilmington Trust said he thinks the Fed will start prepping the markets for rate cuts in March and will begin actually cutting rates in June. He predicted a total of five cuts this year.

Tilley based his June prediction partly on a similar lag between when the Fed last started talking about hiking rates and then actually doing so in March 2022.

"We have to see how the data comes in, and we'll just continue to see that slow turning of the battleship with communication and every little bit of data that comes in that supports the story and makes them more comfortable with inflation."

Brett Ryan, senior US economist for Deutsche Bank Securities, predicted Fed officials will use this week's meeting to signal their coming pivot by tweaking language in the official statement from the central bank's Federal Open Market Committee.

The Fed Will Likely Hold Rates Steady This Week. Markets Want to Know When Rate Cuts Will Start._3

He suggested looking at a specific passage: "In determining the extent to which any additional policy firming may be appropriate," the statement read in December, "… the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

What he expects is that Fed officials will change "in determining the extent of any additional policy firming that may be appropriate" to "in determining future policy adjustments" — essentially removing the word "any."

That tweak, he added, will remove the central bank's "strong tightening bias" and leave it with "a sort of neutral bias" — thus setting the table for future cuts.

Source: Yahoo Finance

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Michelle

Economic

Central Bank

It took a stock market crash, a housing crash and a pandemic to kill the last three U.S. economic expansions.

But of all the risks facing a resilient economy right now, the Federal Reserve may top the list, as U.S. central bankers debate when to lower the restrictive interest rates used to beat inflation that now seems to be in steady decline.

Fed officials have signaled a coming pivot towards lower rates sometime this year to avoid pushing too hard on an economy that is outperforming expectations but which many analysts worry has become too dependent on spending by households that are showing signs of stress and on job growth in a narrow set of industries that masks otherwise-stalled hiring.

With annualized inflation running beneath the Fed's 2% target for seven months, some formulas referred to by officials are pointing to rate cuts sooner than later. Economists, meanwhile, have begun noting the risks of the Fed either falling behind a possible slowdown or of failing to account for the chance the economy may be able to sustain faster growth and more employment than thought without a new surge in prices.

"There is still risk out there that there is a short and shallow recession" in the coming year, said Dana Peterson, the chief economist of the Conference Board. CEOs who participated in a recent survey by the business group continued to cite recession as a top risk for the year, while the board's Leading Economic Index also points in that direction.

Some recent growth drivers, including government spending and business investment, will almost certainly ebb, Peterson said.

"What's left? The consumer."

In an environment where wage growth eases, pandemic-era savings get exhausted, and businesses that have hoarded workers realize labor shortages are easing, Peterson said: "Do we think consumer spending is going to slow? Yes."

US Economic Expansion Likely Hinges on a Nimble Fed This Time_1

DEPENDENT ON CONFLICTING DATA

The Fed is expected to hold its benchmark overnight interest rate steady in the 5.25%-5.50% for the fourth time since July at the end of a two-day policy meeting on Wednesday. Of more note would be any signal in the Fed's policy statement or from Fed Chair Jerome Powell in a post-meeting press conference about the timing and pace of future rate cuts.

The economy's persistent strength in the face of "restrictive" monetary policy has struck a nerve. The S&P 500 index (.SPX), opens new tab touched a record high last week, consumer sentiment is rebounding, President Joe Biden's administration has hailed the progress, and usually prudent central bankers have edged close to declaring that they have nailed the hoped-for "soft landing" in which high inflation is tamed without triggering a painful recession or huge job losses.

It has also begged the question: What's everyone missing?

"Data-dependent" policymakers say they are proceeding with caution, but the numbers have offered more conundrum than clarity, and in fact challenged some of the Fed's basic premises.

US Economic Expansion Likely Hinges on a Nimble Fed This Time_2

At the start of 2023 Powell said household "pain" in the form of rising joblessness and much slower wage growth would be needed to curb high inflation. Even as that dour outlook was dropped, policymakers said a convincing "disinflation" would require a period of growth below the economy's potential, a hard-to-estimate concept the Fed considers to be about 1.8% annually over the long run but which might vary over shorter periods.

Yet inflation has fallen even though the unemployment rate has remained little changed for two years - it was 3.7% in December - and as the economy continues to grow faster than the rate estimated as inflationary. Output expanded in the fourth quarter at a 3.3% annual pace even as inflation slowed. The Fed's preferred inflation measure, the personal consumption expenditures price index, rose at just a 1.9% percent annualized rate from June through December.

US Economic Expansion Likely Hinges on a Nimble Fed This Time_3

'AS GOOD AS IT GETS,' THEN WHAT?

Fed Governor Christopher Waller framed the situation earlier this month as being "almost as good as it gets" for a central banker. "But will it last?," he asked.

The current expansion's durability, remarkable already for restoring the massive job losses seen at the start of the coronavirus pandemic in 2020 and then some, will depend in part on how the Fed's coming policy turn plays out.

US Economic Expansion Likely Hinges on a Nimble Fed This Time_4

The possibilities range from a delayed impact of monetary tightening that still brings "pain" to the job market, perhaps unnecessarily given the path of inflation, to a quite opposite situation in which improvements in productivity and supply dynamics convince the Fed it can lower interest rates even if growth remains strong.

By one Fed measure, the financial conditions shaped by monetary policy are lopping about half of a percentage point annually from growth that officials already expect to slow to about 1.4% this year.

US Economic Expansion Likely Hinges on a Nimble Fed This Time_5

The issue now is whether the Fed can scale expected interest rate cuts to keep even that pace of growth on track given what could be developing weaknesses in the economy - from rising credit usage and defaults among households to the health of banks with loans made against devalued commercial properties.

Fed officials are adamant they won't outstay their welcome with interest rates that remain too high for too long. Still, for now they say they see a greater error in easing prematurely and risking a resurgence of inflation, a mistake the Fed made in the 1970s and one that Powell has pledged not to repeat, than in keeping rates where they are a bit longer.

The Fed is already bucking history with the possible approach of a "soft landing" from inflation that spiked to a 40-year high in 2022, as the pandemic's influence on global supply chains, consumer spending patterns, and hiring practices drove an economic reordering that is still underway.

Since the late 1980s, as inflation and changes in the Fed's policy rate both became less volatile, the U.S. central bank has only gotten through one rate hiking cycle without a significant increase in the unemployment rate: 1994-1996. Doing so required a judgment, which Powell may also face, that inflation pressures were contained despite ongoing growth.

US Economic Expansion Likely Hinges on a Nimble Fed This Time_6

MOVING TOO SLOW?

Until rates fall this time, the jury remains out.

Luke Tilley, the chief economist at Wilmington Trust Investment Advisors, thinks the economy will skirt recession, but doesn't rule out Powell making the opposite mistake of the 1970s-era Fed and leaving policy tighter than needed, with the real hit from two years of large rate increases still to come.

"If we are going to have a recession, that cake is baked. The lagged impact of rate hikes will hit harder than we expect," he said. Inflation seems set to slow faster than the Fed anticipates, and with rate cuts perhaps not starting until June, "I think they'll still have rates too high at the end of the year."

Source: REUTERS

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Chandan Gupta

Traders' Opinions

Commodity

Economic

Fundamental Analysis

In recent developments, the United States witnessed a further slowdown in inflation during December, aligning with the long-discussed notion of a "soft landing" in the economy. As reported last Friday, the Federal Reserve's preferred gauge of inflation decelerated, even as the economy continued its robust growth. This shift in economic dynamics is noteworthy, especially as the U.S. gears up for a potentially heated re-election campaign, with President Joe Biden seeking another term in an election where economic management is poised to take center stage.

According to the latest U.S. government report, prices inched up by a modest 0.2 percent from November to December. This pace closely aligns with pre-pandemic levels and sits just above the Federal Reserve's 2 percent annual target. On a year-over-year basis, prices rose by 2.6 percent, mirroring the levels seen in the previous month. When excluding the often-volatile food and energy costs, the so-called "core" prices registered a 0.2 percent month-on-month increase. Looking at the broader picture, core prices increased by 2.9 percent in December compared to the same period the previous year – the smallest rise since March 2021. Economists generally consider core prices to be a more reliable indicator of the potential trajectory of inflation.

This moderation in U.S. inflation data followed a robust government announcement that the U.S. economy had grown at an unexpectedly strong annual pace of 3.3 percent in the final quarter of the preceding year. Notably, this growth was largely driven by robust consumer spending, defying earlier expectations of a looming recession. Instead, the U.S. economy closed out 2023 with a growth rate of 2.5 percent, up from 1.9 percent in 2022.

However, despite these positive economic indicators, critics of President Biden, particularly from the Republican camp, have been quick to emphasize the most significant surge in inflation in the past four decades. They attribute this surge largely to the spending policies enacted by the current administration. Nevertheless, with inflation showing a marked decline after a prolonged period of subdued consumer sentiment, there are glimpses of improvement in how Americans perceive the state of their economy. A case in point is the University of Michigan's measure of U.S. consumer confidence, which experienced a substantial jump in the past two months – the most significant increase since 1991.

On the whole, the latest data paints a picture of the U.S. economy achieving a challenging "soft landing." In this scenario, inflation edges down to the Federal Reserve's 2 percent target without triggering a recession. This outcome could potentially pave the way for the Fed to consider cutting its key interest rate, which had been raised 11 times since March 2022 as a strategy to combat inflation. The impact of these higher interest rates has reverberated across sectors, putting a damper on home and car sales by elevating borrowing costs. Additionally, businesses have expressed dissatisfaction with the rising interest rates.

To sum up, the recent economic developments in the United States indicate a nuanced landscape. While inflation is slowing, aligning with the Federal Reserve's target, the overall economic growth is surprisingly robust. This dichotomy presents a unique scenario where a "soft landing" is achieved, with positive implications for interest rate considerations. The intricate dance between economic indicators and policy decisions underscores the delicate balance that the U.S. economy is currently navigating. As we await further developments, the evolving narrative of inflation, economic growth, and political dynamics will undoubtedly shape the trajectory of the U.S. economy in the coming months.

Technical Analysis

In the gold market, recent trading sessions have revealed a tug-of-war between attempts to rally and subsequent retracements, leaving prices hovering around the 50-day Exponential Moving Average (EMA). The proximity to this widely watched indicator presents a potential opportunity to build momentum for an upward move.

Below the $2,000 level, a robust support structure is evident, extending down to $1,980. This support has consistently propped up the market, making it a crucial level. On the upside, breaking above the current levels could lead to a checkpoint at $2,040, with further potential targets at $2,060 and a formidable resistance barrier at $2,075. Any move beyond this level could signal a green light for a buy-and-hold strategy.

The dynamics of the gold market are intertwined with interest rates, exhibiting a negative correlation with falling rates. This relationship reflects longer-term behavior and influences price movements. Downside risks are notable, with a breach below $1,980 ringing alarm bells, especially as the 200-day EMA approaches, a key level attracting attention from market participants.

Gold's inherent volatility requires a strategic approach. Despite its unpredictability, selling gold is not currently considered, as the focus leans towards the belief that value hunters will soon enter the market, seizing opportunities to acquire gold at favorable levels.

The current state of the gold market revolves around the delicate dance around the 50-day EMA, highlighting the balance between potential upward momentum and solid support at $1,980. The market's trajectory depends on breaking through key levels at $2,040, $2,060, and the challenging $2,075. The intricate relationship with interest rates adds complexity to gold's dynamics. Conversely, downside risks are marked by the $1,980 level, with the impending arrival of the 200-day EMA intensifying its significance. Gold Consolidates Near Bottom in Overall Range, Reflecting Market Stability Amidst Fluctuations_1