Investment Newsletter – December 2023
According to BofA report, January is Asia’s “big month”: January 13 is voting day for the Taiwan Regional Election, and January 22, the Bank of Japan may end extremely loose monetary policies such as YCC (yield curve control) and NIRP (negative interest rate policy). The biggest event is probably the announcement of the US Treasury bond issuance plan for the first quarter on January 29. The lower-than-expected issuance scale announced on October 30 was the trigger for a “rebound of everything” in the fourth quarter. US bond yields fell from 5% to 4%. Furthermore, January 19 may be the day the US government shuts down. US debt increased by 1 trillion US dollars in 106 days. Currently, the debt size exceeds 34 trillion US dollars. The consensus predicts that the US debt plan of 970 billion US dollars will be announced on January 29, and fear of higher numbers = higher yields. US bonds are in a short-term cyclical bull market in a long-term bear market.
The Fed and US bond yields are influencing the trend of the bond market and stock market. Falling inflation and interest rates may have a positive impact on risky assets, but if the unemployment rate rises, lower interest rates may have a negative impact on risky assets. For the 2024 capital market, the yield of the Federal Reserve and US Treasury bonds are undoubtedly the two most critical variables. However, in terms of asset prices, It is believed that there are three aspects that have the greatest impact: pricing, corporate profits, and new events affecting interest rate (policy) expectations.
The Fed has begun to discuss the slowing of QT. It was mentioned at its December meeting, and then again in comments from Dallas Fed president Lorie Logan, who explicitly referenced the distribution problem, stating individual banks can approach scarcity before the system as a whole. Several banks have mooted summer or as early as April for when the Fed starts to taper or end QT. This imputed switch in focus to reserves is a big gamble for the Fed, as it assumes inflation will continue to moderate this year back towards the 2% target. But there’s an increasing litany of reasons why that might not happen, with, to name a only a few, supply constraints worsening again, leading indicators for wages climbing, and a still-large fiscal deficit. In this paradigm of increasing fiscal dominance, where government borrowing and spending decisions overwhelm monetary policy, central-bank independence has been eaten away at, and instead has led to a form of “reserve dominance”, with decisions on rate cuts and QT, as well as the evolution of markets, the economy and Treasury funding, heavily intertwined.
A key China’s central bank (PBoC) official signalled earlier this week that PBoC may lower the reverse ratio requirements for Chinese banks in 2024 which translates to a potential further accommodative monetary policy stance. Also, the downside pressure inflicted on the yuan via an accommodating monetary policy is likely to be reduced in 2024 as the US central bank, the Fed may start to embark on a dovish pivot path for interest rate cuts in the US.
