Asia open: The US economic outlook continues to improve

Markets

Amidst the seismic US jobs report ongoing aftershocks, US stocks experienced a dip on Monday following Federal Reserve Chair Jerome Powell's less dovish remarks on 60 Minutes, which tempered expectations for imminent and frequently recurrent interest rate cuts. Powell's stance has heightened anticipation for a busy week of corporate earnings, critical for sustaining the recent market rally.

The dominance of the so-called "Magnificent Seven" tech companies in US stock markets has waned at the start of the week as investors and traders reevaluate the likelihood and pace of interest rate cuts in the US this year. This shift reflects a broader reassessment of market dynamics and the implications of monetary policy on various sectors.

Over the past two or three years, bears and market skeptics have repeatedly warned that America’s mega-cap titans could eventually fall well short of revenue expectations. However, pushing back “Bubble Bears”, Meta's recent achievement marked the largest one-day value-creation event in US stock market history. While much of this gain was driven by the promise of increased cash returns to shareholders, at this point of the AI game of chance, adopting a bearish stance against these potential windfalls is challenging, especially if you subscribe to any one of the numerous optimistic AI narratives, even though comparative returns are highly dependent on a lofty starting point.

Yet, for the broader breadth of the index, which seems to be living vicariously on the hope for aggressive Fed cuts, the recent much-improved read on the US manufacturing sector and a blistering update on the labour market have been optimism crunchers. Hence, macro watchers were eagerly eyeing Monday’s only top-tier data release, but evidence that services sector activity across the world’s largest economy re-accelerated last month crushed any hopes for a silver rate cut lining in the data to start the week. Unfortunately, at this stage of the most unusual economic cycle in modern-day history, you won't find any dovish balm in the services sector, that’s for sure.

Overall, the ISM release emphasized the idea that, if anything, the US economy gained momentum last month. At the margins, this suggests a potential resurgence in price pressures.

Considering the jobs report alongside this data, it dealt another blow to expectations of rate cuts in March.

It's only February, yet US equities have already surged 4% in 2024, following a 25% gain in 2023.

The chatterbox about a potential Tech bubble is ongoing, as it often is. It seems there's always someone, somewhere, convinced that US Tech stocks are in a bubble, Although with so many bad actors in play, assessing whether these claims have merit can be challenging. Sometimes, the catcalls have merit, but most times, they do not. This is why everyone’s better served to tune it all out and own an index fund for the long haul. Of course, I can’t guarantee where the index will be in 5 months, but it will undoubtedly be markedly higher in 5 years.

That said, history suggests there is seldom a one-way ticket to paradise regarding investing.

Oil markets

Despite experiencing midmorning New York session losses, oil futures managed to reverse course and settled Monday's session with decent gains. This turnaround aligns with our weekly oil outlook, which anticipated that an improved outlook for the domestic US economy would partially offset the broader bearish bias in oil markets.

Monday's session revealed another round of bullish macroeconomic data from the United States, indicating a likely acceleration in economic activity at the beginning of 2024. The Services Index, published by the Institute of Supply Management, surged by 2.9% to reach 53.4% in January. This increase was primarily propelled by faster growth in new orders, expanding employment, and imports. Remarkably, all ten major service industries in the United States reported growth during this period.

Forex markets

The dollar surged to its highest level in approximately three months following recent remarks from Federal Reserve Chair Jay Powell. Traders reevaluated their expectations regarding the potential number and speed of interest rate cuts in the US for the remainder of the year in response to Powell's comments on 60 Minutes.

Chair Powell's remarks over the weekend and the significantly stronger nonfarm payrolls report released on Friday have increased the likelihood that the Federal Reserve will postpone any rate cuts until May or even June. Lots can happen between then, and FX traders’ positions will most likely get tugged to and fro by incoming data and central bank speak leading up to the February 13 CPI report, which could be a day of reckoning on the 2024 inflation front.