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On the penultimate trading day of 2023, the S&P 500 managed to eke out a nominal gain, retracing early advances just before the closing bell. The benchmark index concluded the session with light trading volume, ending a mere 0.3% below its record closing high set on January 3, 2022.

The three primary U.S. indexes remained relatively unchanged, facing headwinds from recent data revealing higher-than-anticipated unemployment figures and lacklustre home sales.

While one might expect Treasury yields and bonds to rally and the dollar to weaken in response to negative growth surprises, the reality differed on Thursday. The lacklustre auction of seven-year Treasury notes overrode the rates market impulse, suggesting that the market may be showing signs of bond market buying fatigue due to the Treasury's increased issuance of new bonds. As a result, U.S. yields in the 10-year area moved higher, all three U.S. indexes basically stayed put, and the dollar recovered some lost ground.

Over in Asia, the weak US numbers could potentially have a negative ripple effect, particularly on export-driven economies sensitive to U.S. growth, which may begin to reflect a more bearish outlook.

Also, pushing back on the Santa Rally money market funds concluded the year on a positive note, experiencing a turnaround after two consecutive weeks of outflows. In the week ending December 27, MMFs attracted $16.4 billion, countering the previous week's redemptions and restoring total assets to near-record levels achieved earlier in December.

The destiny of trillions parked on the metaphorical sidelines is a pivotal question as 2024 commences. Various perspectives have been presented, with some viewing the substantial amount of money in money market funds as a potential source of dry powder for a prolonged rally in risk assets. Conversely, others suggest that, based on historical patterns, it might take an actual Fed rate cut before significant MMF outflows materialize.

Concerns also linger about the potential ripple effects of any MMF exodus that may occur. In 2023, elevated MMF balances played a role in systemic stability, mainly as MMFs shifted from the Fed's RRP facility to Treasury bills, helping absorb the surge in Treasury supply and mitigating liquidity strain during the implementation of Quantitative Tightening (QT). With the RRP expected to drain fully by mid-2024, the reserve decline may prompt the Fed to consider halting balance sheet runoff.

In summary, 2023 presented a tumultuous journey marked by economic and financial upheavals. However, robust growth in real spending played a crucial role in maintaining relatively tight labour market conditions, defying earlier predictions. The U.S. unemployment rate, at 3.7% in November, increased marginally compared to the end of 2022. Nonfarm payrolls are anticipated to grow by approximately 2.8 million jobs in this year's Q4/Q4 period. To put this in perspective, the U.S. economy generated 1.9 million jobs in the same period in 2019, the year before the pandemic.

Even so, restrictive monetary policy and easing supply constraints over the last two years have brought consumer inflation down faster this year than many expected, even at the Federal Reserve. CPI inflation, which averaged 7.1% in Q4 2022, has slowed to around 3.1% year-on-year. The expectation is that if inflation continues to moderate in 2024, it will contribute to the ongoing rise in real disposable incomes. This could sustain consumer spending, even with reduced government and business investment spending support in the first half of 2024

Reflecting on these developments during the holiday season serves as a reminder to approach recession predictions for 2024 with caution. While some economists may reassert their “Perma Bear” forecasts, there is an equal risk of underestimating the U.S. economy's resilience and performance in the upcoming year.

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