Market 12/29: SOFR rate rises - question mark on banking system liquidity

Interest rate SOFR rises: risk liquidity of the banking system

Standard repo SOFR rate rises to 5.4% — the highest level in history.

=> SOFR rise may reflect scarcity of liquidity in the banking system!

Cause:

SOFR (Secured Overnight Financing) is the interest rate in the interbank market for short-term (overnight) loans secured by T-bond and other safe assets.
- This interbank market is used internally by commercial banks to promptly resolve short-term cash shortages and supplement required reserve cash at Fed.
- Therefore, in general, SOFR is usually equivalent to the Fed rate (Fed Fund Effective Rate) under normal conditions.
- However, SOFR is surging compared to FFER. This only happens when bank liquidity is problematic, increasing interbank borrowing demand.
Since after the 2008 Financial Crisis, SOFR has gradually become the benchmark for US banks to set interest rates for commercial loans (replacing UK's LIBOR).
High SOFR will have a significant impact on corporate borrowing costs…
=> corporate borrowing rates will rise, exacerbating the credit crunch problem.

Chicago PMI drops the most in over 3 years

December Chicago PMI falls from 55.8 to 46.9 (back to contraction territory), much lower than the expected 50.

2023 ends with economic data showing little change, although market survey data has been more positive in the past 2 months (due to surging stocks).

But recently, survey data has started returning to reality as numbers gradually decline (as evidenced by Chicago PMI).

5 notable events of the US stock market in 2024

A volatile 2023 for the US stock market is about to end. Investors are looking towards 2024 optimistically as S&P 500 nears record high. Here are 5 notable events for investors in 2024:

S&P 500 breaks record high

The market is currently pricing in an earlier and deeper easing cycle. Interest rates are expected to fall 1.5% next year, double the Fed officials' forecast.

S&P 500 is less than 0.5% away from the record high on 3/1/2022. The S&P 500 is forecasted to end 2024 at 4,833.

Big Tech growth

Magnificent 7 - 7 tech giants contributed up to 64% of S&P 500's gain this year as AI fever explodes.

According to Navellier & Associates forecast, 6/7 stocks will perform well in 2024 (except Apple).

US Presidential Election

Next year is an election year with an incumbent president running, which could create a bullish scenario for US stocks.

According to Stock Trader's Almanac: since 1949, S&P 500 has risen an average of nearly 13% in those election years.

Asia: BoJ, China and election in India

BoJ is maintaining the world's last negative interest rate policy.
However, most forecasts suggest Japan will implement its first rate hike since 2007 in April 2024.
After a disappointing year, Chinese investors will watch this country's National People's Congress meetings and the third plenary session on Beijing's 2024 growth targets.
India is a bright spot in Asia as the country signs potential manufacturing contracts, boosts infrastructure investment, and emerges as an alternative to China's manufacturing market.

ECB, BoE policies

Bond markets expect the European Central Bank to cut rates in April, which could boost regional stocks.
BoE is forecasted to follow Fed and ECB in easing as the UK is one of the G-7 countries with the highest inflation rates.