New Year doubts weigh on Wall Street

2024 begins with a mixed bag of economic data

Following an impressive rally for global equity markets into year-end, investors started the new year in risk-reduction mode, locking in profits on trades made after the Federal Reserve's (Fed's) dovish pivot. The Nasdaq fell over 3% in its first week of trading, while the S&P 500 and the Dow Jones fell 1.59% and 0.60%, respectively.

Economic data at the end of last week proved to be a mixed bag. A larger than expected increase in non-farm payrolls (216k vs 170k exp), higher than expected average hourly earnings (0.4% vs 0.3% exp) and an unchanged unemployment rate at 3.7% were offset by downward revisions to prior months and a larger than expected fall in private payrolls. Providing further dovish offset, a downside surprise in the December services ISM at 50.6 versus 52.5 expected.

This week, the key economic event in the US will be inflation data for December.

What is expected from the December inflation report?

Current expectations are for headline inflation to edge higher to 3.2% year-on-year (YoY) from 3.1% in November. Core consumer price index (CPI) is expected to ease to 3.8% YoY from 4.0% in November 2023.

While the core measure is still above the Federal Reserve's (Fed's) 2% target, disinflation over the back half of 2023 has the six-month rate at around 2%. As such, the question is when, not if, the Fed will begin cutting rates in 2024 as it attempts to deliver a soft landing.

Ahead of the CPI release, the probability of a 25bp Fed rate cut in March sits at 62%, with almost six 25bp cuts priced for 2024.

S&P 500 technical analysis

While the decline in the S&P 500 in late October slightly overshot our ideal pullback target, we quickly resurrected our bullish call, which paid handsome dividends into the end of 2023.

With the odds of a completed five-wave rally at the late December 4793 high increasing after last week's initial rejection, we are now neutral on the S&P 500 due to the possibility of a deeper pullback in the opening months of 2024.

Should the pullback call materialise, we will firm up targets as the correction unfolds; however, let's use support 4600/4550 as a potential pullback target for now.

S&P500 daily chart

Nasdaq technical analysis

The Nasdaq has followed the road map to perfection during the second half of 2023, bottoming as expected in the 14,200/14,000 support zone before a stunning rebound to new highs.

In our last updates in mid-December, we highlighted the appearance of a five-wave rally in the Nasdaq (Elliott Wave) and warned caution was warranted.

With the odds of a completed five-wave rally at the late December 16,969 high increasing after last week's initial rejection, we are now neutral on the Nasdaq, aware that a sustained break below support at 15,900/15,800 would be a warning that a deeper pullback towards the Wave IV low at 14,000 is under way.

Nasdaq daily chart

^{The figures stated are as of 8 January 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}