Weekly Commentary

January 10, 2025

Markets capped off a shortened trading week with a lackluster Friday, as the December jobs and unemployment report came in much stronger than expected, which led to the expectation that the Fed would be reluctant to cut interest rates further.? Rates on the long end of the curve continued to back up all the way to near the 4.80% level, while the USD index rose to near the 110 level on the rate differential between the US and the rest of the world.? Gold also continued to notch gains to well above the $2700 level, reflecting the heightened policy uncertainty, both fiscal and monetary.? Next up on the macro front is the CPI reading (due mid-week next week), which should also have a significant impact on rates and the treasury market. These macro data points are a prelude to the earnings season, which will get underway next week.? With the tech sector leading the way, all eyes will be on big names such as Meta, Google, Microsoft, and of course Nvidia.? And with the inauguration a week away, we expect volatility to be heightened over the next few weeks at least.??

We continue to view credit (US investment grade especially) as our favored sub-asset class in fixed income, and definitely favor the sector over long duration, especially with the uncertain fiscal environment in the US, and a strong US economy favors spread compression.? With the EUR nearing parity with the USD, we also see EM debt as wobbly, as hard currency obligations are increasingly harder to service.? Commodity prices remain a wild card, as a stronger USD has historically been a headwind, but we have also seen precious metals and crude oil rally this week, a sign of both geopolitical volatility and, in the case of crude, weather conditions that are likely to be transitory.? Speaking of weather conditions, the wildfires raging in Southern California are on track to be the most devastating natural disaster in history, and insurance companies have taken a sharp nosedive on the expected losses to be incurred.? While we are cognizant of the human suffering involved in this crisis and send our thoughts and prayers to the affected parties, we think property and casualty insurers could be under continued pressure in the long term due to these risks and higher replacement costs, among others.? Conversely, look for homebuilders and construction materials companies to benefit due to this tragedy as well.