US Bond and Equity Rally Cools to Kick-Off 2024 as Global Tensions Mount

2024 begins with a bond and equity sell-off. Swap rates/Treasury yields rose today in conjunction with a broader global bond sell-off, the short-end of the curve rising as many as 8bps while the long-end climbed 4-5bps. The 10-year yield nearly surpassed 4%, as it peaked at 3.97% before closing at 3.92%. Meanwhile, equities cooled off from a record-setting 2023, as the Nasdaq 100 fell 1.7% today, the third-worst start to a fiscal year since 2001.

UK food inflation drops to lowest level in over a year. This holiday season proved magical for UK consumers, as food inflation dropped to 6.7% in December from 7.7% in November, the lowest in over a year. The softer food inflation led to strong December performance by the UK’s two largest supermarkets Aldi and Lidl, and follows November UK headline CPI data which spurred rate-cutting bets after coming in well below forecasts at 3.9%. The BOE’s policy rate sits at 525bps, up 515bps since 2021, and futures markets are pricing in 150bps of cuts by the end of 2024. Policy rate decisions made by the BOE, the central bank for the 5th largest economy in the world, have far-reaching impacts that include driving changes in UST yields and the value of the US Dollar.

Red Sea tensions escalate, but markets are waiting for price impact to be felt. Iran deployed a single warship into the Red Sea today, marking the latest escalation of tensions in the region. WTI crude climbed ~1% on the news in early morning trading but settled ~2% lower on the day at ~$70.50 per barrel given broad risk-off sentiment. Oil prices have declined from a ~$94 peak in September 2023, and only increased slightly in mid-December before largely reversing gains at year-end, but Helima Croft, head of global commodity strategy at RBC, isn’t convinced that tensions are fully priced in. She said, “the market is basically saying, we will wait and see until something happens…but it’s really getting much more serious every day.”