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MAC Monitor — January 8, 2024

Multi-Asset Class Risk Monitor Highlights | Week Ended January 5, 2024

  • Strong labor-market report dampens Fed pivot hopes
  • Euro traders continue to bet on ECB rate cuts despite inflation uptick
  • Positive correlations keep portfolio risk high and diversification limited

Strong labor-market report dampens Fed pivot hopes

Global bond markets got off to a rocky start in the New Year, as traders once more revised their monetary-policy expectations in the light of another strong US labor-market report. Non-farm payroll figures released on Friday showed that the American economy added 216,000 new jobs in December, comfortably beating analyst projections of 170,000. Average hourly earnings also grew more than anticipated—0.4% month-on-month versus a 0.3% forecast—keeping up underlying inflationary pressures. Short-term interest-rate futures markets reacted by reducing the amount of predicted Federal Reserve rate cuts this year from 150 to 125 basis points. The move also propagated further out the US Treasury curve, with yields for maturities greater than 2 years climbing by an average of 0.17%.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 5, 2024) for further details. 

Euro traders continue to bet on ECB rate cuts despite inflation uptick

The euro weakened against both the US dollar and British pound in the week ending January 5, 2024, as market participants maintained their projection of 150 basis points worth of rate cuts from the European Central Bank this year, despite a slight uptick in Eurozone inflation. A flash estimate released on Friday indicated that overall consumer prices in the common-currency area grew by 2.9% last year, up from 2.4% in the 12 months ending in November. However, the reported headline number was slightly lower than the consensus prediction of 3%, and more importantly, core inflation, which excludes more volatile energy and food costs, continued its recent descent, falling for a fifth consecutive month to 3.4%. 

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated January 5, 2024) for further details. 

Positive correlations keep portfolio risk high and diversification limited

The predicted short-term risk of the Axioma global multi-asset class model portfolio stood at 10.2% as of Friday, January 5, 2024, as correlations across asset classes and risk-factor types stayed predominantly positive. Equities accounted for just over 60% of total portfolio volatility—compared with a monetary weight of 50%—while non-US sovereign bonds provided the largest percentage risk contribution of 12% among the fixed income assets, both on an absolute basis and relative to their market-value weight of 10%. Most of what limited diversification could still be had, stemmed from the oil position, which remained uncorrelated with all other securities in the portfolio.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 5, 2024) for further details.