Equities linger near all-time highs as markets look to 2024

Risk-on sentiment in markets

With the Federal Open Market Committee (FOMC) voting unanimously to hold rates steady in its December meeting, market sentiment was largely positive to close the year. Both the Dow Jones and S&P 500 closed 2023 at or near all-time highs, as the once unlikely prospect of a soft landing continues to look more attainable. Looking ahead to 2024, it’s likely that inflation, employment, and Fed decision-making will continue to dominate conversations around market outlook in the context of corporate hedging programs, particularly when it comes to FX and interest rate risk.

USD outlook in 2024

The recent dovish messaging from Jerome Powell is largely bad news for the U.S. dollar, as the prospect of a declining interest rate environment generally puts downward pressure on a currency, particularly if other central banks are still raising rates. The U.S. Dollar Strength Index, which measures USD strength against a basket of currencies, declined to about 101 to finish the year, compared to 104 before the Fed’s most recent decision. There may be additional weakness to come in 2024 if market expectations for rate cuts are correct.

For corporations with USD inflows and foreign-denominated expenses, dollar weakness can create operational challenges and threaten to erode margin. This is a common fact pattern for companies that are selling goods and services in the U.S. but sourcing raw materials or manufacturing abroad. As always, the materiality of FX impacts on your P&L will depend on your unique exposure profile. Chatham often conducts detailed analysis projects to forecast FX outcomes for companies under different scenarios, including once hedges are put in place.

Interest rate outlook in 2024

The market continues to forecast multiple rate cuts in the coming months, and the forward curve largely held steady in the final two weeks of the year. Given that no action is expected at the first meeting of the FOMC on Jan 30-31, market participants will need to follow the messaging of Powell and other members to glean any insight around changing attitudes. The March 19-20 meeting of the FOMC is the first where markets expect a rate cut, though confidence in that projection varied significantly in December. A lot could change over the next three months but, as always, the Fed’s underlying targets of full employment and 2.00% inflation will guide their decision-making.

The week ahead

Both nonfarm payrolls and initial jobless claims will be released later this week, providing the latest insight into the strength of the job market. PMI readings and factory orders will also serve as indicators of manufacturing health in the U.S.