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Economic Trends and Financial Market Reactions in 2023

GOOVER DAILY REPORT June 30, 2024
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TABLE OF CONTENTS

  1. Summary
  2. Economic Impact of US Presidential Election Debate
  3. Trends in Banking and Personal Finance
  4. US GDP Growth and Economic Slowdown
  5. US Dollar and Inflation Dynamics
  6. Precious Metals and Market Sentiment
  7. Stress Tests on Major Banks
  8. Currency Market Dynamics
  9. Stock Futures and Market Reactions
  10. Performance of Asian Markets
  11. Conclusion

1. Summary

  • The report titled "Economic Trends and Financial Market Reactions in 2023" delves into the influential economic trends and financial market responses observed during 2023, primarily focusing on the U.S. and global markets. Key topics include the impact of the U.S. presidential election debate on the USD's strength and inflation risks, trends in consumer banking towards certificates of deposit (CDs), and the effects of high-interest rates on GDP growth and consumer behavior. Additionally, the report evaluates the USD's performance under various economic conditions, the analysis of precious metals market amid Fed policy speculation, the resilience of major banks post-stress tests, and global currency market fluctuations driven by political uncertainties and economic data. Finally, the performance of stock futures and Asian markets is discussed in the context of evolving economic indicators and investor sentiment shifts.

2. Economic Impact of US Presidential Election Debate

  • 2-1. Impact on USD strength

  • Following the first US presidential debate between Democratic President Joe Biden and Republican rival Donald Trump, the US dollar experienced an increase in strength. Investors closely monitored the debate, which affected market odds for a Trump win, leading to expectations of upside inflation risks. Such risks might prompt the Federal Reserve to maintain higher interest rates for a prolonged period, keeping US Treasury yields elevated alongside a resilient US dollar. According to Convera’s Market Insights team, political turmoil in Europe and FX weakness in Asia also contributed to the dollar's appeal. Overall, the USD Index observed a slow upward trend despite declining nominal and real yields in June.

  • 2-2. Market odds and inflation risks

  • The debate resulted in a noticeable shift in market odds, slightly increasing the likelihood of a Trump win. This scenario could translate to higher inflation risks, influencing the Federal Reserve's strategy to keep interest rates higher for longer. Goldman Sachs' analysis underlined that potential outcomes, like a divided House or unified government, would have divergent impacts but generally suggest a more dovish Fed policy if Trump were to win. Meanwhile, a Democratic victory is anticipated to result in a weaker US dollar due to broader fiscal stimulus expectations. Market participants are advised to monitor these developing risks closely as they could lead to increased market volatility.

  • 2-3. Eurozone market response

  • Political uncertainty within the Eurozone and its markets has been exacerbated by the US presidential debate. The debate's indirect effects also highlighted the market's sensitivity to external political developments. Convera's analysis indicated that the Eurozone's economic sentiment missed expectations, contributing to a broader trend of moderating inflation expectations and financial market reactions. Additionally, events such as the impending French election amplified the volatility in EUR/USD currency pairs. Political jitters in the Eurozone reinforced the demand for the EUR/USD tail risk, with volatility expectations hovering at five-month highs.

3. Trends in Banking and Personal Finance

  • 3-1. Shift towards certificates of deposit

  • The data analyzed from the Federal Deposit Insurance Corp. (FDIC) reveals a significant shift in consumer preference towards certificates of deposit (CDs), including brokered CDs, especially amidst a rising interest rate environment. Major banks have responded by increasing their assets in CDs to counteract the outflow of cash from low-yielding accounts. Specifically, while total deposits remained steady, funds in low-interest accounts decreased, and allocations in CDs rose. For example, Bank of America's CD deposits surged from $72 billion in early 2023 to $191 billion by March 2024.

  • 3-2. FDIC data analysis

  • The FDIC's quarterly data shows that many financial institutions, including major and regional banks as well as online banks, have adjusted their strategies to cope with changing consumer preferences. While the federal funds rate maintains its target range of 5.25 to 5.50 percent, CDs have emerged as a competitive deposit option for savers. This is evident in the shifts observed in major banks like Bank of America, which showed a significant increase in funds allocated in interest-bearing accounts such as CDs, contrasted by a decline in non-interest-bearing deposits.

  • 3-3. Consumer behavior and market sentiment

  • Consumers have increasingly moved their money out of low-yield savings and checking accounts into higher-yielding CDs and online bank offerings. This trend is attributed to the heightened awareness of the benefits of higher APYs, spurred by the Federal Reserve's rate hikes. As interest rates escalated post-COVID, depositors have shown a growing preference for accounts that offer better returns. Nonetheless, a significant portion of consumers continue to miss opportunities in high-yield savings, as indicated by survey data showing that less than a quarter of Americans earn an APY of 4 percent or higher on their savings.

4. US GDP Growth and Economic Slowdown

  • 4-1. High Interest Rates and Inflation Pressure

  • The U.S. economy has experienced a significant deceleration due to persistent high-interest rates imposed by the Federal Reserve and continuous inflation pressures. Key economic indicators show a marked slowdown in GDP growth during the first half of 2024. The Atlanta Fed's GDPNow forecast has downgraded its Q2 growth projection from 3% to 2.7%. High borrowing costs have impacted consumer and business behavior, contributing to reduced economic activity.

  • 4-2. Consumer Spending and Business Investment

  • Personal spending, a primary driver of U.S. GDP, slowed to an annualized rate of just 1.5% in Q1 2024. The housing market is particularly affected, with mortgage rates around 7% leading to a substantial drop in home sales. Business investment has also faltered, evidenced by a 0.5% decrease in core capital goods shipments, the largest dip in three months.

  • 4-3. Federal Reserve Monetary Policy

  • The Federal Reserve's policy of maintaining high-interest rates to combat inflation has significantly impacted GDP growth. Although this policy aims to reduce inflation, which remains around 3%, it has led to slower economic growth. The Fed's dot plot suggests only one rate cut in 2024, but some analysts expect up to two cuts this year due to the cooling labor market and weakening consumer spending.

5. US Dollar and Inflation Dynamics

  • 5-1. Dollar strength and PCE data

  • Recent data show that the U.S. dollar has gained strength, particularly ahead of the release of the Personal Consumption Expenditures (PCE) data. In May, U.S. monthly inflation was unchanged, with a notable drop in goods prices counterbalanced by a modest increase in the cost of services. According to the Commerce Department's report, consumer spending rose marginally, raising optimism for a potential 'soft landing' for the economy orchestrated by the Federal Reserve. This could involve reducing inflation without triggering significant economic downturns. Financial markets responded to this data by adjusting expectations for a Federal Reserve rate cut, which increased to 68% for a potential rate cut by September from a previous 64%. Over the past six months, market sentiment has shifted to anticipate this scenario, influenced by multiple reports of declining goods prices and marginal increases in services costs. The PCE price index was observed to have a flat reading following a 0.3% gain in April, with goods prices dropping by 0.4% and energy goods such as gasoline decreasing by 3.4%.

  • 5-2. Euro political uncertainty

  • The euro experienced pressure due to significant political uncertainties in Europe, particularly highlighted by the French elections. The latest polls indicated a rise in popularity for the far-right National Rally, potentially winning up to 37% of votes, which has created market concerns. This political risk, alongside concerns over unfunded tax cuts proposed by far-right factions, has affected the euro's value, causing it to fall by 0.1% to 1.0695 against the dollar. The Deutsche Bank and other institutions have noted that these uncertainties add to the volatility and weaker performance of the euro in the face of U.S. dollar strength. The fear of a National Rally victory and subsequent political instability has investors cautious, creating hesitation in European currency markets.

  • 5-3. Market expectations for Fed rate cuts

  • Market analysts, including those at ING, anticipate that the Fed may not fully price in a rate cut until November, despite increasing bets for a September cut based on easing inflation indicators. Consumer confidence metrics have also played a role in this speculation, with marginal declines reported. Goldman Sachs has highlighted how the upcoming presidential elections will likely increase market volatility, potentially impacting Federal Reserve decision-making and market expectations. With inflation readings aligning with economists’ expectations and the Fed maintaining its current interest rate range, market participants remain divided over the timing and extent of future rate cuts. The dynamics of the PCE data and political events continue to shape market predictions about the Federal Reserve's actions.

6. Precious Metals and Market Sentiment

  • 6-1. Gold and Silver Performance

  • Gold advanced for a third consecutive quarterly gain, the best run since the pandemic-affected 2020, with a price steady near $2,323 an ounce after gaining more than 1% in one day. Over the quarter, gold has risen more than 4%, setting a nominal daily record last month. Silver traded near $29 an ounce, marking a 16% increase this quarter. Both platinum and palladium also saw advances.

  • 6-2. Fed Policy Impact

  • Expectations for easier monetary policy from the Federal Reserve supported gold gains. Traders focused on the upcoming U.S. inflation data to gauge when the Fed might start reducing interest rates, which would benefit bullion since it doesn’t pay interest. The Fed's preferred inflation gauge slowed to an annualized rate of 2.6%, the lowest since March 2021, which might set the stage for lower rates.

  • 6-3. Central Bank Purchasing Activity

  • Central banks’ concerted purchasing activity significantly bolstered gold prices, offsetting the drag from net sales by bullion-backed exchange-traded funds. This sustained demand played a critical role in supporting gold amid weakening currencies in many Asian regions.

7. Stress Tests on Major Banks

  • 7-1. Federal Reserve’s annual stress test

  • The Federal Reserve released the results of its annual stress test on June 27, 2024. This test evaluated how the 31 largest U.S. banks would perform in a hypothetical financial crisis. The conditions of this year's test simulated a severe global recession, including a 40% decline in commercial real estate prices, a substantial increase in office vacancies, a 36% decline in house prices, and a peak unemployment rate of 10%. Despite these severe conditions, all banks tested were found to have sufficient capital to withstand the hypothetical recession and meet minimum capital ratios.

  • 7-2. Impact on bank performance

  • The stress test results indicated that all banks were well protected against an actual recession, although they fared worse on average compared to the previous year's test. Notably, Goldman Sachs was the 'worst hit,' experiencing a year-over-year increase of roughly 100 basis points in its stress capital buffer. This implies Goldman is exceeding the minimum requirement for globally important banks by about 60 basis points, meaning it has less excess capital compared to similarly sized peers. Other banks like Huntington Bank and Citigroup were among the best-performing in the test. Overall, the aggregate common equity tier 1 (CET1) capital ratio was projected to decline from 12.7% to 9.9% under stress, though still within the range of recent tests.

  • 7-3. Investment outlook from analysts

  • Despite the negative performance in the stress test, analysts remain optimistic about Goldman Sachs. Bank of America analysts continue to list Goldman as a buy, with a price objective of $525, citing potential for an improving baseline in the future. Oppenheimer analysts also list the stock as a buy, with a target price of $517. Conversely, a Morningstar analyst recommends holding the stock, with a target price of $417. According to Bank of America, Goldman’s earnings per share are expected to decrease by 3% due to slower-than-expected buybacks, but they maintain a positive outlook on the stock's long-term performance.

8. Currency Market Dynamics

  • 8-1. EUR/USD, GBP/USD, USD/CAD, USD/JPY forecasts

  • The U.S. Dollar Index (DXY) steadied after data showed inflation cooled last month, reinforcing expectations of Federal Reserve rate cuts this year. The stability of the Dollar Index, which reflects the greenback’s performance against major currencies, indicates a cautious outlook amid inflation and interest rate changes. For EUR/USD, the rate remained flat at $1.0701, with the euro down 1.3% against the dollar in June. The euro’s decline, marking its biggest monthly fall since January, was influenced by political uncertainty ahead of France’s general elections. EUR/USD shows potential bullish momentum with support at 1.0710 and further resistance at 1.0786. GBP/USD showed minimal movement, hovering around recent levels. The market weighed mixed economic signals from the UK, notably inflation concerns and economic growth prospects. GBP/USD faces resistance at 1.2671 and 1.2698, with neutral momentum indicated by an RSI of 49.81. USD/CAD reflected stability in oil prices, a key driver for the Canadian dollar. This stability suggests balanced market sentiment, with the pair trading at 1.3657, below the 50-period SMA, indicating a bearish trend. USD/JPY steadied at 160.82 after hitting a 38-year high of 161.27, driven by significant interest rate differentials between the U.S. and Japan. The pair’s stability follows U.S. inflation data, with markets expecting Federal Reserve rate cuts this year. USD/JPY is trading at 160.78, with support at 159.48 and resistance at 161.00, suggesting moderate bullish momentum.

  • 8-2. Impact of political uncertainties and economic indicators

  • Political uncertainties and economic data significantly influenced major currency pairs in 2023. The euro faced downward pressure due to political uncertainty ahead of France’s general elections. Speculation around future Federal Reserve rate cuts based on cooling inflation indicators affected the Dollar Index's performance, while mixed economic signals from the UK impacted the pound. The Japanese yen faced significant influence from differing interest rates between the U.S. and Japan. Statements from Federal Reserve officials about maintaining high interest rates contributed to the yen's record low against the US dollar, with increased market speculation around these economic policies.

  • 8-3. Record low Japanese yen

  • The Japanese yen traded at 160.86 against the US dollar, its weakest level in over 37 years since December 1986. This decline was driven by prevailing dollar buys over yen due to significant interest rate differences between the United States and Japan. The U.S. Federal Reserve’s stance on maintaining high interest rates has added to the upward pressure on the USD/JPY rate. The yen has lost about 2.3 percent of its value relative to last week’s USD/JPY intraday low of 157.16. Japan's Ministry of Finance has intervened to support the yen, spending approximately 9.79 trillion yen ($61 billion) between April 26 and May 29. However, these interventions had limited success, attributed to strong market forces and speculative trading. Speculation remains about the potential for further intervention if USD/JPY continues to rise significantly.

9. Stock Futures and Market Reactions

  • 9-1. Stock futures and bond yields

  • Stock futures pared losses and bond yields fell after the latest batch of economic data reinforced speculation that the Federal Reserve would be able to cut rates this year. Specifically, S&P 500 contracts were little changed, and Treasury 10-year yields dropped three basis points to 4.30%.

  • 9-2. Impact of economic data on market sentiment

  • Recurring applications for US jobless benefits rose to the highest level since the end of 2021, hinting at longer periods for unemployed individuals to find jobs. Orders placed with factories for business equipment declined unexpectedly in May, reflecting firms' cautious stance on investment amid high borrowing costs and softer demand. This economic scenario influenced market sentiment significantly.

  • 9-3. Performance of key stocks and sectors

  • Hedge funds aggressively sold tech stocks in a month when Nvidia Corp briefly became the world's largest company. This net selling of US tech stocks is on track to be the largest since 2017. Nvidia shares experienced significant volatility, plunging 13% over three days and erasing $430 billion in market value before recovering some losses. Additionally, Micron Technology Inc.'s disappointing forecast led to a decline in its stock, impacting investor expectations for the AI sector.

10. Performance of Asian Markets

  • 10-1. Asian shares gaining momentum

  • Asian stocks were on track for a fifth straight month of gains, bolstered by a growing view that cooling US inflation could prompt the Federal Reserve to ease interest rates this year. The Stock Exchange of Thailand, despite moving in a tight range around its four-year low, showed some trading activity boosted by the announcement of measures to drive the capital market. For the week, the SET index moved between 1,296.67 and 1,324.48 points, closing at 1,300.96 on Friday, down 0.4% from the previous week.

  • 10-2. Impact of US inflation and Fed rate cuts

  • The growing perception that US inflation is cooling has led to hopes that the Federal Reserve might ease interest rates. This sentiment has provided a positive outlook for Asian markets, driving Asian stocks to gain momentum. Additionally, the yen tumbled to a 38-year low against the dollar, trading past 161 to the dollar, despite Japanese authorities stepping up their warnings of possible intervention to stem the decline.

  • 10-3. Key sectors and stocks in focus

  • Certain sectors and stocks have become focal points for investors. Trinity Securities projects that La Nina will peak in the fourth quarter, potentially benefiting food processors and hydropower operators. Prominent stocks to watch include COCOCO, SAPPE, STGT, SCCC, TASCO, BCH, BBL, KTB, CKP, and TVO. The technical outlook provided by Trinity Securities identifies support at 1,270 points and resistance at 1,340 points, while UOB Kay Hian sees support at 1,280 points and resistance at 1,320 points.

11. Conclusion

  • The comprehensive analysis of 2023 economic trends illustrates the multifaceted dynamics affecting financial markets. The U.S. presidential election debate significantly influenced the USD's strength and market expectations, with political events heightening market volatility. Consumers gravitated towards higher-yield banking products like CDs amid rising interest rates, adjusting their financial strategies accordingly. Persistently high inflation and the Federal Reserve's tight monetary policy curtailed economic growth and affected currency market dynamics. Precious metals, especially Gold, gained traction as investors anticipated loosened Fed policies. Despite stringent stress tests, major banks demonstrated resilience, maintaining adequate capital levels. Furthermore, global currency markets showed diverse responses to political uncertainties and shifting economic conditions, emphasizing the need for vigilance and strategic investment. These findings underscore the importance of continuously monitoring market signals and adjusting investment strategies to navigate the complex financial landscape ahead.

12. Glossary

  • 12-1. USD (United States Dollar) [Currency]

  • The USD's performance was influenced by political events, market odds for rate cuts, and economic data such as the PCE index. Its strength against other currencies reflected market sentiments and inflation expectations.

  • 12-2. Federal Reserve [Institution]

  • The Fed's monetary policies, including rate hikes since 2022 and potential future rate cuts, significantly impacted economic growth, inflation dynamics, and market reactions.

  • 12-3. Gold [Commodity]

  • Gold's price movements were driven by anticipation of Fed policy changes, higher demand in Asia, and central bank purchasing activity. It exhibited robust performance amid economic uncertainties.

  • 12-4. GDP (Gross Domestic Product) [Economic Indicator]

  • U.S. GDP growth rates indicated the economic impact of high interest rates and inflation, reflecting broader trends in consumer spending, business investment, and labor market conditions.

  • 12-5. Certifications of Deposit (CDs) [Financial Product]

  • CDs gained popularity as a safe, higher-yield savings option among consumers, influenced by rising interest rates and shifts in banking strategies to attract deposits.

13. Source Documents