Bonds Looking More Attractive

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Global equities were firmer on the week despite an uptick in US consumer prices and retaliatory strikes by US and British forces against Houthi militias in Yemen. The raids came in response to repeated attacks against commercial shipping and US naval forces in the region and helped keep the price of a barrel of West Texas Intermediate crude elevated at $74.50. The yield on the US 10-year Treasury note held steady at 4% while equity volatility, as measured by the Cboe Volatility Index (VIX), fell to 12.5 from 13.5 a week ago.



Completion of the Trans Mountain pipeline expansion is more likely following Friday’s decision by the Canada Energy Regulator to approve a request for a pipeline variance from the company building the project. The pipeline is  expected to increase capacity to 890,000 barrels per day from 300,000 bpd currently. The Trans Mountain pipeline is owned by the federal government, which purchased it in 2018. The project’s costs have spiralled through the course of construction from an original estimate of $5.4 billion to the most recent estimate of $30.9 billion taxpayer dollars. This is all about the prospect of selling our oil to Asia, and we remain unconvinced of the viability of this project. There are huge oil reserves in South America already providing supplies to Asia at very competitive prices and we believe Canada will, from an environmental and competitive price pressure standpoint, face continued pressure to compete globally.



The US Consumer Price Index rose a more-than-expected 0.3% in December from the month before after rising only 0.1% in November. On a year-over-year basis, prices rose 3.4%, up from November’s 3.1% pace. Elevated housing and auto insurance costs stood out. Despite the unwelcome data, markets are continuing to expect a quarter-point rate cut from the Fed in March. Benign producer price data released Friday helped soothe fears that inflation will become “stuck” well north of the Fed’s 2% target. Federal Reserve Bank of New York President John Williams said on Wednesday that monetary policy is restrictive enough for the Fed to reach its 2% inflation goal and that meaningful progress on bringing down inflation has been made though inflation remains far above target. He said rates will normalize as inflation falls and the timing and speed of any cuts depends on the economy. Several other Fed officials downplayed the likelihood of a rate cut coming as early as March. Our position is that we do not expect rate cuts to start until at least May of this year.



European Central Bank President Christine Lagarde said Thursday that absent a shock and with rates likely at their peak, cuts can begin once data confirm that inflation is on a path to reach the central bank’s target. On Friday, the ECB’s chief economist, Philip Lane, said that rate cuts are not a topic for discussion in the near term.

Euro zone unemployment fell to 6.4% in November, the lowest level in the 25-year history of the euro zone.



Beginning in February, Saudi Arabia will cut the price of crude oil bound for Asia by $2 a barrel amid persistent weak demand. Analysts had expected a smaller, $1.25 a barrel cut. Oil prices have traded choppily in a range in the mid-$70 a barrel amid the continued disruption of oil shipments through the Suez Canal and Iran’s seizure of a Greek-owned tanker over a dispute about sanctions evasion.

Makoto Sakurai, a former Bank of Japan board member, said that he expects the central bank to hike rates in April after the conclusion of spring wage talks in March.

Inflation in Argentina ended 2023 at 211%.

A Chinese invasion of Taiwan would shave 10.2% from world GDP in the first succeeding year. US growth would decline 6.7%, and growth would decline 16.7% and 40% in China and Taiwan, respectively.

China’s share of the MSCI Emerging Markets Index fell to 23.8% of the index as of December 31, about 16% below peak levels in 2020. In early 2024 trading, Chinese stocks have fallen toward a five-year low. India’s weighting in the index increased to 16.7% at the end of 2023, Taiwan’s to 16% and South Korea’s to 12.9%.

Consumer prices in China declined for the third-straight month in December, dipping 0.3% from a year ago while producer prices fell 2.7%. Falling prices in China should keep downward pressure on goods prices globally. Exports from China rose 3.8% last month, led by electric vehicles. The People’s Bank of China is expected to trim interest rates on Monday.



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