In a significant shift from the last decade and a half, the equal weight S&P 500 now trades at a substantial 100% premium to its cap-weighted counterpart. This marks a stark contrast to 15 years ago when the equal weight index commanded a mere 10% premium. The prevailing sentiment that "big is beautiful" seems to be losing ground, particularly as the MAG 7 continues to influence market valuations. Meanwhile, global financial markets grapple with declining yields, which have notably impacted currency pairs like USD/JPY, driving them to new lows.
The global economic landscape is experiencing notable changes. Initial jobless claims in the United States have risen slightly by 14,000, reaching a seasonally adjusted figure of 217,000. While these numbers might indicate potential labor market adjustments, retail sales for the year concluded on a robust note, providing a contrasting economic signal. Industrial production is also projected to see a modest increase with a 0.3% month-over-month uptick in December.
A pivotal development is the Federal Reserve's potential policy direction. Fed's Waller, in an interview with CNBC, suggested that inflation could ease sufficiently to warrant interest rate cuts sooner than previously anticipated.
"Inflation is likely to continue to ease and possibly allow the U.S. central bank to cut interest rates sooner and faster than expected." – Fed's Waller
He further hinted at the possibility of multiple rate cuts in 2025.
"Three or four cuts could be possible in 2025." – Fed's Waller
These comments have contributed to a decline in global bond yields and steepening of the yield curves. As a result, equities surged yesterday, especially in Europe's cyclical sector, although their US counterparts lagged behind.
China's economy has concluded 2024 on an unexpectedly positive note. The country's GDP grew by 5.4% year-over-year in the fourth quarter, surpassing earlier forecasts and providing a boost to global economic sentiments. This development comes amidst a broader lacklustre interest in high-valued global tech growth companies, particularly those based in the US.
In currency markets, the Japanese Yen's performance stands out as it benefits from the ongoing drop in global yields. The USD/JPY has set new lows just above the 155 mark, reflecting these dynamics.
Attention now turns to Europe where the final Euro area Harmonised Index of Consumer Prices (HICP) data for December will be released. This data will provide deeper insights into inflation dynamics across the region. Meanwhile, Poland has opted to keep its key rate unchanged at 5.75%, maintaining its current monetary stance.
The overarching theme reflects a complex interplay of economic factors and market responses. The lack of enthusiasm for high-valued tech stocks contrasts with the optimism surrounding cyclical sectors in Europe. This divergence underscores shifts in investor sentiment as they navigate varying regional economic conditions.