We will assume that readers know by now that yesterday turned out to be a great day for the stock market — and the Treasury market for that matter. It was a great day because Fed Chair Powell reportedly did not tighten the screws of his monetary policy position any further.
Some will contend that he actually loosened the screws a bit. We would argue that he showed up with his toolbox at the Brookings Institution but never took a tool out of the box. The market, waiting with bated breath for the Fed Chair to lower the hammer, let out a huge sigh of relief when he did not.
The market’s worst fear then was not realized and that became a rally catalyst that ultimately triggered a huge short-covering rally and some chasing action as the S&P 500 broke above key resistance at its 200-day moving average.
It was an overreaction in our estimation because the Fed Chair repeated just about everything he said following the November FOMC meeting, but in splitting linguistic hairs, some added attention was paid to his summation that “the ultimate level of interest rates will be somewhat (emphasis our own) higher than previously expected” versus the original contention that “the ultimate level of interest rates will be higher than previously expected.”
Apparently, somewhat was some kind of word. It didn’t launch a thousand ships, but it launched a rally in the Dow Jones Industrial Average that culminated with a finish nearly 1,000 points off yesterday’s low. The other indices made some similarly, super-charged rebound efforts. The Nasdaq closed up 4.4% and the S&P 500 gained 3.1%.
Today, therefore, presents a new test. It is the follow-through test. At the moment, the stock and bond markets are passing the test.
The S&P 500 futures are up 15 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 32 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are up 42 points and are trading in-line with fair value. The 2-yr note yield, meanwhile, is down five basis points to 4.33% and the 10-yr note yield is down 11 basis points to 3.59%. The U.S. Dollar Index has dropped 0.8% to 105.14.
The markets are pricing in a peak inflation/peak policy narrative. Granted the fed funds rate is still going higher from current levels, but market participants can smell a peak in the policy rate around 5.00% in the first half of next year. If the FOMC elects to raise the target range by 50 basis points at the December meeting, the target range will be 4.25-4.50%.
The October Personal Income and Spending Report favored the “smaller” rate hike at the same time it favored a soft landing possibility.
Briefly, personal income increased 0.7% month-over-month in October (Briefing.com consensus 0.4%) and personal spending jumped 0.8% (Briefing.com consensus 0.8%). The PCE Price Index was up 0.3% month-over-month (Briefing.com consensus 0.4%) and the core-PCE Price Index, which excludes food and energy, increased 0.2% (Briefing.com consensus 0.2%).
On a year-over-year basis, the PCE Price Index was up 6.0%, versus 6.3% in September, and the core-PCE Price Index was up 5.0%, versus 5.2% in September.
The key takeaway from the report was the improvement in the inflation readings, particularly the core-PCE Price Index given Fed Chair Powell’s emphasis that the Fed’s policy tools are better designed for working on core inflation.
Separately, initial jobless claims for the week ending November 26 decreased by 16,000 to 225,000 (Briefing.com consensus 238,000) while continuing claims for the week ending November 19 increased by 57,000 to 1.608 million.
The key takeaway from the report is that the low level of initial claims remains indicative of an otherwise solid labor market but, importantly, it also continues to favor a potentially softer landing for the economy.
The November ISM Manufacturing Index (Briefing.com consensus 49.8%; prior 50.2%) will be another focal point when it is released at 10:00 a.m. ET.
The focal point for now, however, is the behavior of the market itself. Stocks are holding up reasonably well despite a 7.7% decline in Dow component Salesforce (CRM) following its earnings report, because stocks are happy with the thought that the Fed is about to take a softer touch with its toolbox and will perhaps soon stop hammering home the rate hikes altogether.
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Originally Posted December 1, 2022 – A follow-through test presents itself
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