As we step into 2024, the financial markets are bustling with activity, fueled by optimism and closely watched metrics. The Q4 rally in bonds, bullion, and market breadth has set the tone for early 2024, but the question remains: will this trend persist or reverse?

1. Deciphering the December Non-Farm Payrolls (NFP) and Average Hourly Earnings (AHE):

• A strong December NFP figure above 220k and AHE above 0.3% could push the GT10 yield to 4.25%.
• Conversely, a weaker NFP below 140k and AHE below 0.1% might see the GT10 drop to 3.75%.

These fluctuations highlight the sensitivity of the market to employment and wage growth data.

• US dollar: Up by 1.1%
• Oil: Gained 0.8%
• Crypto: Increased by 0.5%
• Commodities and Cash: Unchanged at 0.0%
• High-Yield (HY) Bonds: Down by 1.0%
• Gold: Decreased by 1.1%
• Investment Grade (IG) Bonds: Fell by 1.2%
• Government Bonds: Dropped by 1.4%
• Stocks: Tumbled by 1.7%

Tale of the Tape: The Federal Reserve and bond yields are playing a pivotal role in shaping the credit and stock markets. The trend suggests:

• Lower inflation and rates positively impact risk assets.
• Higher unemployment coupled with lower rates negatively affects the market.
• The crucial aspect lies in the Fed’s approach in H1 2024, especially considering the significant bond supply needed for refinancing in both government and corporate sectors.

2023 witnessed a stark outperformance of large-cap growth over value by 33 percentage points – a significant margin only second to the one seen in 1979. This was followed by small-cap value and growth stocks, influenced by higher yields and an aversion to leverage. However, the recent yield collapse from 5% to 4% over the past ten weeks has made leverage and breadth bullish.

• The Big Picture: December’s payroll data will be crucial. The divergence between contracting ISM and resilient payrolls, alongside strong stocks and decelerating job openings, paints a complex picture.
• Risk Alert: A significant risk for 2024 lies in the potential reversal of the Q4 rally in bonds, bullion, and market breadth.

As we navigate through 2024, keeping an eye on these key indicators and understanding their potential impact on corporate profits and interest rates will be essential for investors and market enthusiasts. The financial landscape is ever-evolving, and staying informed will be key to making sound investment decisions.