We will start the new year with initial jobless claims, an important data point, today and the ISM manufacturing data, which is particularly significant, on Friday.
The ISM manufacturing index is expected to come in at 48.2, slightly below last month’s 48.4, but the prices paid index is forecasted to rise to 51.4 from 50.3.
This will be something to watch closely, especially as recent Fed Survey data and NFIB metrics hint at a resurgence of pricing pressures.
Broadly, the S&P 500 leveraged futures contracts haven’t shown signs of recovery, suggesting a lack of demand. For instance, the March contracts finished Tuesday at 74.5, sharply lower than prior highs near 180.
This suggests leverage demand has normalized from previously stressed levels. Whether this is an end-of-year balance sheet adjustment remains to be seen, and we’ll have a clearer picture during the first two weeks of trading, especially after the jobs report on January 10.
Yesterday, the reverse repo facility saw a significant jump to $473 billion, up nearly $200 billion from the prior day. This facility, which once held over $2.5 trillion daily, had declined to near-zero levels by December 20. The rise is surprising, as the expectation was for it to continue draining liquidity and head toward zero. Most of this liquidity has shifted into Treasury bills, an effective way to soak up excess liquidity.
With a new administration coming in, there’s speculation about shifts in debt issuance strategy, potentially moving from T-bills to longer-duration bonds (5, 7, 10, or even 30 years). Such a shift could push long-term rates higher. Currently, the 10-year yield is around 4.5%, but based on inflation swaps and nominal GDP trends (5–6%), 10-yr rates could climb toward 5% or even 6%.
(BLOOMBERG)
The Fed’s rate-cutting cycle appears to be nearing its end, with market pricing suggesting minimal likelihood of multiple cuts this year.
With neutral rates estimated at 3.5%, adding 300 basis points points to a potential 6–6.5% for the 10-year yield.
Liquidity draining from the reverse repo facility and shifting into longer-duration assets may reduce leverage in the market. Significant U.S. debt rollovers expected this year could also create further liquidity challenges.
On the equity side, Tuesday’s NYSE new highs minus new lows were negative 41. The cumulative trend in this metric is starting to roll over, which can signal underlying market weakness. Historical patterns show that persistent declines in this measure often precede broader equity downturns.
S&P 500 Faces Test
The S&P 500 is at a critical juncture, with a potential head-and-shoulders top pattern forming. The neckline is around 58.65. A move below this level, especially if accompanied by a gap lower, could signal further downside. Conversely, if the neckline holds, it could indicate bullish momentum. The next few days will be crucial in determining the market’s direction.
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Terms:
1. Reverse Repo Facility: A tool used by central banks to manage liquidity by borrowing funds from banks in exchange for collateral.
2.Liquidity Drain: The removal of excess cash or capital from the financial system, affecting market dynamics.
3.T-Bills: Short-term U.S. government debt securities with maturities of one year or less.
4.Leverage: The use of borrowed capital to increase potential returns on an investment.
5.ISM Manufacturing Index: A leading economic indicator that tracks manufacturing activity.
6.Prices Paid Index: A component of manufacturing indexes that reflects changes in input costs.
7.Inflation Swaps: Financial derivatives used to hedge or speculate on future inflation rates.
8.Neutral Rate: The theoretical interest rate where the economy grows at its potential without causing inflation or deflation.
9.Head-and-Shoulders Pattern: A chart pattern used in technical analysis to predict a trend reversal.
10.Island Reversal: A technical analysis pattern indicating a potential trend reversal in stock prices.
11.Nominal GDP: Gross Domestic Product measured in current prices, without adjusting for inflation.
12.Cumulative New Highs Minus New Lows: A breadth indicator showing the net number of stocks making new highs versus new lows over time.
13.Swap Pricing: The market-determined cost of financial contracts that exchange cash flows or risks, often related to interest rates or inflation.
14.Duration: A measure of the sensitivity of a bond’s price to changes in interest rates.
15.Fed Fund Futures: Contracts that represent market expectations for Federal Reserve interest rate moves.