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MAC Monitor — February 5, 2024

Multi-Asset Class Risk Monitor Highlights | Week Ended February 2, 2024

  • Strong labor-market report smashes March rate-cut hopes but boosts the dollar 
  • Short Gilt yields rise despite dovish signals from BoE 
  • Portfolio risk falls further as US stocks book fourth week of gains 

Strong labor-market report smashes March rate-cut hopes but boosts the dollar 

The US dollar soared to a 7-week high against a basket of major trading partners, as investors largely discounted the possibility of a Federal Reserve rate cut in May, following a much stronger-than-expected labor-market report on Friday, February 2, 2024. Short-term interest-rate futures at the Chicago Mercantile Exchange now imply a one-in-five probability that the FOMC will ease monetary conditions at its upcoming meeting on March 19-20, down from an almost equal chance only a week earlier. The revision came in the wake of the latest non-farm payroll (NFP) report, which showed that the US economy added 353,000 new jobs in January—almost twice the 180,000 increase predicted by analysts. 

That being said, a lot can still change in the six weeks to the next rate decision, with one more NFP report and two more inflation releases on the way. Core prices, in particular, have been growing in line with a 2% annual rate over the past six months, and if we do not see a repetition of the big month-over-month surges from January (+0.4%) and February (+0.5%) last year, the Fed may yet decide that the economy has cooled sufficiently for it to be able to take the foot of the monetary brake in March. 

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated February 2, 2024) for further details. 

Short Gilt yields rise despite dovish signals from BoE 

Short-term British Gilt yields edged higher in the week ending February 2, 2024, despite a softening in language from the Bank of England following its Monetary Policy Committee (MPC) meeting on Thursday. With inflation undershooting projections from its last monetary policy report from November and now even expected to temporarily fall to the 2% target in the second quarter of this year, the Bank removed its previous warning that “further tightening” could be required. Still, only one MPC member voted to lower rates already at this meeting, while two continued to argue for further tightening, with the remaining six in favor of the status quo. The monetary policy-sensitive 2-year benchmark rate closed the trading day slightly lower after the announcement, but then rebounded to its highest level since mid-December on Friday, buoyed by the soaring bond yields on the other side of the Atlantic Ocean. 

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated February 2, 2024) for further details. 

Portfolio risk falls further as US stocks book fourth week of gains 

The predicted short-term risk of the Axioma global multi-asset class model portfolio plummeted by more than a percentage point to 7.1% as of Friday, February 2, 2024, due to a further drop in FX and equity volatility, as US stocks recorded a fourth consecutive week of gains. But it was non-US developed and emerging-market shares, which experienced the biggest risk declines relative to their market-value weights, as local returns were partially muted by opposing exchange-rate movements. Oil also saw its share of total portfolio volatility nearly cut in half from 1% to 0.6%, making it the least risky asset class in the portfolio, both on an absolute basis and relative to its monetary weight. 

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 2, 2024) for further details.