In the first week of 2024, global stock and bond markets experienced their worst start in 20 years in terms of evaporated total market capitalization. At the end of the previous year, pessimistic expectations for the global financial market in 2023 were proven wrong as stock markets rose and bonds recovered from severe losses at the beginning of the year. The notion of a soft landing for the US economy was widely discussed, and investors even began to dream of a prosperity reminiscent of the 1990s. However, the first week of 2024 brought a cold shower.

According to data from Bloomberg, the total market capitalization of global stock markets evaporated by more than $2 trillion in the first week, and the total market capitalization of global bond markets fell by about $1 trillion, with a combined evaporation of up to $3.18 trillion, equivalent to approximately 23 trillion yuan.

All major US stocks fell, with small-cap stocks and the Nasdaq index experiencing the largest declines. The Nasdaq index fell by 3.25% for the week, marking the largest weekly drop since March 10, 2023; the Nasdaq 100 fell by 3.09%, ending a nine-week winning streak; the Russell 2000 fell by 3.75%, falling for two consecutive weeks after six weeks of gains; the S&P 500 index fell by 1.52% for the week, marking the first decline in the past 10 weeks and ending the longest winning streak in nearly two decades. Seven major technology stocks, including Apple, Microsoft, Alphabet, Meta, Amazon, Nvidia, and Tesla, collectively lost more than $400 billion in market value this week, equivalent to approximately 290 billion yuan, with stock prices almost giving back all of December's gains.

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At the same time, US Treasury bonds and corporate bonds both recorded their largest weekly decline since October. Yields on US Treasury bonds of all maturities rose this week: the 10-year Treasury bond yield returned to 4%; the 30-year Treasury bond yield saw the largest increase, rising by 16 basis points, marking the second-largest yield increase since the beginning of 2011; the 2-year Treasury bond yield rose by 13.5 basis points, the largest yield increase since the beginning of 2005. According to US media citing Deutsche Bank strategists, if the S&P 500 index falls in the first five trading days of the year, its average annual increase is 1.1%, while if it rises during the same period, its average annual increase is 11.2%.

MSCI, the index compiler tracking stocks from 47 countries, had a joyful year in 2023, rising by more than 20% since the beginning of January, but with significant trading volatility. Stock prices have been rising since the first half of 2023, then declined from August to October. Betting on interest rate cuts has been the main theme of overseas trading since early November 2023, with most major global stock indices recording double-digit gains in November and December last year, driven by a strong rebound, as declining inflation has given investors greater hope for interest rate cuts in 2024.

Soon after, the Federal Reserve sent signals to cool the market. Richmond Fed Chairman Thomas Barkin recently warned again that if inflation heats up again, the possibility of raising interest rates still exists. He said that the possibility of a soft landing for the US economy is increasing, but not inevitable. Some risks that could disrupt a soft landing include the decline of inflation and the slowdown of the US economy, but Barkin believes these will not trigger a recession. The latest minutes of the Federal Reserve's December 2023 monetary policy meeting also leaned hawkish, emphasizing on one hand that it is appropriate for monetary policy to maintain a restrictive stance for some time, while pointing out that the path of interest rate cuts is "highly uncertain." The market, which was wildly betting on the Federal Reserve cutting interest rates in March this year, was caught off guard, also contributing to the sharp decline at the start of 2024.

Since March 2022, Federal Reserve officials have raised interest rates 11 times, with the goal of bringing the inflation rate back to the target level of 2%.

Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, told Caijing reporters that the focus is now shifting to inflation. In the coming days, the three major global economies, the United States, China, and Japan, will all release inflation data. The market may pay attention to the rise in the overall Consumer Price Index (CPI) in the United States and the expected further decline in core interest rates. Japan's overall and core interest rates are expected to continue to slow down, highlighting the lack of pressure on the Bank of Japan to change its policy, especially after the recent earthquake. It is expected that China's reported deflation will be slightly lower than in November last year. Nevertheless, the economy still needs more support, and the possibility of reducing the benchmark one-year medium-term lending facility later this month seems to be increasing.

The latest data released by the US Bureau of Labor Statistics shows that the US non-farm employment population increased by 216,000 people in December 2023, which is stronger than the market expectation of 170,000 people and is the highest increase since September last year, indicating that the labor market is still stronger than expected while the Federal Reserve is trying to slow down economic growth. The non-farm report also implies that there is still an upward risk of inflation, which is conducive to market bears and a more hawkish monetary policy. Several Wall Street investors told Caijing reporters that the release of US employment data has caused market fluctuations because the data contains many contradictory signals. The first week of January has provided an important preview for the rest of the year, and at least so far, the market tone is more turbulent compared to the smooth sailing of last year.The rise in the U.S. stock and bond markets in 2023 has ignited investors' hopes for the market to reach new heights by the end of the year and in 2024. By Jin Yan, a reporter for Caijing.

Additionally, consumer spending, which accounts for about 70% of the U.S. economy, is likely to have cooled off after the post-pandemic recovery. Credit card and auto loan delinquency rates are on the rise, student loan repayments have resumed, consumer spending is cooling, and major retailers have issued warnings. The "weakness" in the U.S. consumer sector is apparent but not severe. On one hand, the pullback in consumer spending is good news for Federal Reserve officials, but high interest rates and the decline in pandemic savings may ultimately lead to even weaker consumer spending in 2024, which could be another sign of the long-predicted slowdown in the U.S. economy.

Jeffrey Young, former Global Head of Foreign Exchange at Citigroup and Co-Founder and CEO of DeepMacro, told Caijing reporters not to be deceived by the overall data. The job market is slowing down, and so is the overall economy. Nevertheless, this is not a collapse, and there should be great confidence in the U.S. economy: the expansion in the U.S. is enduring, even if it has become increasingly mature.

According to Guojin Macro, one "tail risk" that the market is concerned about is: if the U.S. economy achieves a "soft landing," the risk of reflation in 2024 may exceed expectations again, thereby prompting the Federal Reserve to raise interest rates again and causing a "double kill" in the capital markets for both stocks and bonds. Strictly speaking, since the late 1950s, there has been only one case of "second tightening" after the end of an interest rate hiking cycle and a pause in rate hikes for a period (more than a quarter). Empirically, the risk of reflation in the context of an economic soft landing tends to occur after the Federal Reserve lowers interest rates, not before. In other words, worrying about reflation and believing that the Federal Reserve does not have the conditions to lower interest rates may reverse the cause and effect. The specific timeline of events (or phenomena) is as follows: disinflation - Federal Reserve rate cuts - economic recovery (soft landing) - reflation - Federal Reserve's second rate hike. Therefore, the risk of reflation affects the space for rate cuts, not whether there will be rate cuts.