Non-Farm Payrolls rise by 216,000 in December, much better than expected

How will December’s job results impact Fed’s decision to cut rates?
Team Halogen
January 8, 2024

Market Movements

Global Macro Highlights 

✂️ Fed officials in December saw rate cuts likely, but path highly uncertain, minutes show
📉 US initial jobless claims falls to 202k, vs exp 210k
📊 U.S. payrolls increased by 216,000 in December, much better than expected

Source: Bloomberg

Markets entered the first week of 2024 with high hopes for easier conditions on the back of a more dovish Fed. This was evident by the run up in asset prices and positioning in the last two weeks of 2023. Unfortunately, disappointment was to be had this week, as participants seemed to decide that the pricing of Fed cuts had become too extreme. We saw tactical trade recommendations come out of the woods early on in the week, which seemed to sway prices. March FOMC expectations started the week near 80% for a cut. This retreated to 64% by Friday.

A slew of jobs data also indicated that hiring continued to outperform expectations. December ADP data came in at 164k vs. 115k expected, while NFP numbers also beat handily, coming in at 216k vs. 170k expected. 10y yields, which had started the year in the 3.80% range, hit a high near 4.10% on Friday night after the data release. Some of that move did reverse when the ISM Non-Manufacturing PMI dropped later in the day, missing estimates by 2 points.

US equities had one of their worst starts in nearly 20 years. The SPX500 is down 1.5% to start, and the Nasdaq is down 3.3%. In the currency space, the Dollar is also having a great start to the year, led particularly by USD/JPY. The short USD/JPY trade has been a crowd favourite on expectations of monetary policy normalisation by the Bank of Japan. However, those expectations have frequently failed to deliver. USD/JPY hit a high of ¥146 on Friday night, despite opening the year just below ¥141.

Malaysia Market Highlights

🇲🇾 Ringgit weak as US dollar dominates amid uncertain US rate cut path
✅ PM launches Padu ahead of targeted subsidy implementation

Social media was set alight by a less than ideal launch of the government online database, PADU, but in all seriousness this marked another crucial step in subsidy rationalisation. The implications to the country’s fiscal standing remains uncertain at this juncture but a pessimist would expect higher domestic cost-push inflation in the near future. 

The domestic bond market showed signs of a hangover from the good times in 4Q23, with the market able to digest a RM5bn auction that reopened the 10-year Government Investment Issue (“10y GII”) with a strong 2.44x bid-to-cover, but with yields cheapening by 10 basis points with an average yield of 3.91%. The yield on the 10y GII was 3.80% at the end of 2023, according to Bond Pricing Agency Malaysia data. The bearish sentiment in local bonds stemmed from weaker sentiment in the US Treasury market as described in the earlier Global Macro Highlights section. 

Source: Bond Pricing Agency Malaysia

Corporate bonds fared better by comparison:

The Ringgit, despite managing to close 2023 below the psychological RM 4.60 level, did not buck the trend of Dollar strength in the region. USD/MYR traded to a high of RM 4.6550 on Friday. Foreign participants were observed to be absent in Friday’s 10y GII reopening, which didn’t help from a portfolio inflow perspective.

Despite the weaker bond market this week, the Halogen Shariah Ringgit Income Fund continued to mark another week of being able to deliver consistent returns. This further underlines the fund’s ability to shield from volatility and market uncertainty, while still delivering a decent return.

Crypto Market Highlights

📈 Bitcoin Plummets to $41K, $350M Liquidated in an Hour Following Matrixport's ETF Rejection Speculation
🤝 JPMorgan, Goldman in Talks With Grayscale About Bitcoin ETF Role
✏️ Final Bitcoin ETF Application Filings Get Posted by Major U.S. Exchanges

Source: Bloomberg

Cryptocurrencies opened the year strong, as expectations for the SEC to finally approve the outstanding spot Bitcoin ETF applications continued to mount. Bitcoin surged on New Year’s Day to break above $44,000, and notched a high of $45,879 on Binance the day after. 

On Wednesday though, Matrixport, a Singapore based crypto asset manager, released a rather eye-raising report: they expected the SEC to reject the applications at this time. They did not cite if this was based on official sources, or if it was an opinion piece. They also did not explain their reasoning, just that the applications did not fulfil a crucial requirement by the SEC.

With a market already positioned long, it didn’t take much to upset the balance of things. As the news made the rounds, the previous bullish price action gave way to a cascade of selling. Weak longs were liquidated across the board in the crypto complex, with some $      650 million of liquidations taking place. Over 3 billion in Open Interest was wiped out in Bitcoin futures alone. Bitcoin was down 9% at the lows, stopping just shy of the 40,000 level, where dip buyers started to emerge. Some alts fared much worse, down 25-30% at some point (for instance, Ripple went from 62 cents to 50 cents over the event).

The entire episode happened in minutes. However, cooler heads then prevailed and questioned the reasoning behind the report. Bloomberg ETF analyst Eric Balchunas, who has been covering the Bitcoin ETF applications closely, had always pegged the chances of approval at 90% behind solid reasoning. The market recentered itself, retrospectively called the cleansing ‘healthy’, and slowly unwound the damage. Bitcoin traded back to a high 44,350 on Friday night.

While several industry experts had raised the possibility of a decision on the ETF applications to come anytime during the last week, this did not materialise. The largest probability still falls on the window from 8-10 January.

What we are monitoring for the week ahead

What does all of this mean? Our thoughts 

This week’s poor start to US markets probably disappointed a fair few participants. This pullback does seem natural though, given the level of build up we saw in the closing weeks of December. For now, the retracement actually looks healthy, and the reasoning we see is mainly that the market had gone too far in pricing rate cuts by the Fed. Compared to a more data driven outcome, this is still acceptable, and the expectations for this trade are more tactical as opposed to secular trend.

In fact, Friday’s NFP data was not all bad for the outlook. While December’s headline number beat by 46k jobs added, job revisions to Oct and Nov numbers were - you guessed it - lower. Oct’s number was revised lower by 45k, and Nov’s number was actually 26k lower. So in aggregate, the NFP number was a net 25k lower. And it wouldn’t be surprising to see the Dec number being revised lower at next month’s print. Thus, the macro outlook for a slowing of the economy and easier financial conditions still remains intact for now.

In our opinion, the correction in MYR bond markets is a healthy one after what may have been too strong a move to end 2023. The correction may have a bit more to go as we see 4.00% being a strong resistance for 10-year yields. Nonetheless, we’re happy to report that the Halogen Shariah Ringgit Income Fund continues to prove that it can shield against volatility yet again.

We’ve highlighted that the days leading up to the Bitcoin ETF decision would be volatile and crucial to prepare for. We certainly got a taste for that in the immediate aftermath of the Matrixport release. That report has now become the laughing stock of Crypto Twitter (or Crypto X now), especially when Matrixport’s research portal was shown to have differing opinions, including one where BTC would rise on an ETF approval.

In any case, we’ve always placed more weight on the insight’s shared by Eric and his colleague James Seyffart at Bloomberg. As mentioned, the SEC literally spelt out the roadmap for applicants to have the highest chances for approval, listing a slew of conditions and amendments to be made. The SEC has also been in continuous dialogue with applicants and their named partners. A regulator does not do that unless they themselves think there is a high chance for approval to be had. And after Grayscale’s victory in court vs. the SEC, we can certainly expect suits to be filed if the SEC arbitrarily rejects these applications.

The fact that the Matrixport opinion piece could move the markets to such an extent though, does highlight the extent of speculative positioning in play. And that always leads to volatility and unanticipated outcomes. It also highlights the left tail risk in this scenario - if indeed there’s a delay or an outright rejection by the SEC, Bitcoin could revisit the low 30,000s quite easily in a much larger liquidity cascade. And the altcoin universe will not be spared either, as cross liquidations will kick in.

Certain altcoins are maintaining pockets of strength though. The Cosmos ecosystem has been booming, led by Celestia and Sei which are promising blockchain projects in that ecosystem. In particular, Celestia has enjoyed a slew of strong buying, as new projects have been airdropping tokens to wallets that stake their spot TIA holdings. Meanwhile, the Bloomberg ETF team covering the momentous decision have also started to set sights on the Ether ETF cycle, with James being of the opinion that the SEC’s approval of the Ether Futures ETF lending strong argument for the classification of Ether as a commodity instead of a security.

We maintain our base case for an approval decision, followed by a buy the rumour, sell the fact reaction. However, we are staying very, very nimble and are prepared to react to various outcomes. We encourage investors to plan their actions in advance, and be satisfied with them no matter the outcome. We also think that investors should continue to look towards an allocation to Ethereum, which Halogen is happy to facilitate via our Halogen Shariah Ethereum Fund.

Thank you for reading and we’ll see you next week!

Team Halogen

Disclaimer: The information, analysis, and viewpoints presented here are intended solely for general informational purposes and should not be construed as personalised advice or recommendations for any specific individual or entity. For personalised investment decisions, individual investors are advised to consult their licensed financial professional advisor. The opinions expressed by the Manager are based on certain assumptions or prevailing market conditions, and they are subject to change without prior notice. This material is being distributed for informational purposes only and should not be regarded as investment advice or an endorsement of any particular security, strategy, or investment product. While the information provided herein may include data or opinions from sources believed to be reliable, its accuracy and completeness are not guaranteed. Reproduction of any part of this material in any form or reference to it in other publications is strictly prohibited without the express written permission from Halogen Capital Sdn Bhd. Halogen Capital Sdn Bhd and its employees assume no liability regarding the use of this material or its contents.

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Team Halogen
January 7, 2024
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