As the penultimate trading day of 2023 unfolded, the S&P 500 managed a nominal gain, retracing early advances just before the closing bell. The benchmark index concluded the session with light trading volume, ending a mere 0.3% below its record closing high set on January 3, 2022.
Despite recent data revealing higher-than-anticipated unemployment figures and lackluster home sales, the three primary U.S. indexes remained relatively unchanged. Surprisingly, the lackluster auction of seven-year Treasury notes on Thursday overrode expectations of rallying yields and weakened the dollar. This indicated signs of bond market buying fatigue due to increased Treasury bond issuance, resulting in higher U.S. yields in the 10-year area.
In Asia, the weak U.S. numbers could potentially have a negative ripple effect, particularly on export-driven economies sensitive to U.S. growth, signaling a more bearish outlook.
Contrary to expectations, money market funds concluded the year on a positive note, experiencing a turnaround after two consecutive weeks of outflows. In the week ending December 27, MMFs attracted $16.4 billion, countering the previous week’s redemptions and restoring total assets to near-record levels achieved earlier in December.
As 2024 commences, the destiny of trillions parked on the metaphorical sidelines remains a pivotal question. Differing perspectives exist, with some viewing the substantial amount of money in money market funds as potential dry powder for a prolonged rally in risk assets. Conversely, others suggest that significant MMF outflows might necessitate an actual Fed rate cut based on historical patterns.
Concerns linger about potential ripple effects of any MMF exodus. In 2023, elevated MMF balances played a role in systemic stability, primarily as MMFs shifted from the Fed’s RRP facility to Treasury bills, aiding in absorbing the surge in Treasury supply and mitigating liquidity strain during the implementation of Quantitative Tightening (QT).
In summary, 2023 marked a tumultuous journey with economic and financial upheavals. Despite predictions, robust growth in real spending played a crucial role in maintaining relatively tight labor market conditions. The U.S. unemployment rate, at 3.7% in November, saw a marginal increase compared to the end of 2022, with nonfarm payrolls expected to grow by approximately 2.8 million jobs in this year’s Q4/Q4 period.
Despite restrictive monetary policy and easing supply constraints, consumer inflation has dropped faster than anticipated, averaging 3.1% year-on-year after reaching 7.1% in Q4 2022. If inflation continues to moderate in 2024, it could contribute to the ongoing rise in real disposable incomes, potentially sustaining consumer spending even with reduced government and business investment spending support in the first half of 2024.
Reflecting on these developments during the holiday season serves as a reminder to approach recession predictions for 2024 with caution. While some economists may reassert their “Perma Bear” forecasts, there is an equal risk of underestimating the U.S. economy’s resilience and performance in the upcoming year.
