Dealing with some rate-cut angst

There was no Santa Claus rally this year, but let’s not kid ourselves. There was a Santa Claus rally, only it started in late October and simply veered off course for some R&R over the last five trading sessions of 2023 and the first two trading sessions of 2024.

To that end, we wouldn’t get too caught up in the fact that the S&P 500 declined 0.9% in the past seven trading sessions, with almost all of that decline coming yesterday, not when it rallied as much as 16.8% from its low on October 27.

What we would get caught up in is seeing how the market responds to the pullback, which widened out yesterday to include many stocks and not just the mega-cap stocks. There again, though, that shouldn’t have come as any surprise. Going into yesterday, the S&P 500 Equal-Weighted Index was up 18.2% from its low on October 27.

Currently, the S&P 500 futures are down three points and are trading 0.1% below fair value, the Nasdaq 100 futures are down 77 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are up 83 points and are trading 0.2% above fair value.

Why the mixed disposition?

It is partly due to this: Apple (AAPL) is down 1.2% after being downgraded by Piper Sandler to Neutral from Overweight; American Express (AXP) is up 1.0% after being upgraded by JPMorgan to Overweight from Neutral; Eli Lilly (LLY) is up 1.2% after announcing LillyDirect, whereby patients can obtain obesity, migraine, and diabetes medications direct from Eli Lilly, and Walgreens Boots Alliance (WBA) is down 2.2% after topping fiscal Q1 expectations and slashing its dividend by 48%.

Those are some of the key corporate news drivers along with APA Corp’s (APA) $4.5 billion all-stock acquisition of Callon Petroleum (CPE).

There are some macro drivers in play today as well. Energy prices are up on geopolitical angst and Treasury yields are higher on rate-cut angst. That is, there is some budding angst that the Fed might not cut rates as much as expected.

That view has been driven partly by the FOMC Minutes for the December 12-13 meeting that were released yesterday and partly by some economic data released this morning.

Briefly, the minutes noted that it seemed likely a lower target range for the fed funds rate would be appropriate by the end of 2024, but that the path to lower rates was highly uncertain. There were acknowledgments, too, that future data could make further rate hikes appropriate and that the target range for the fed funds rate could be held where it is longer than anticipated.

Treasury yields rallied yesterday, mostly on the added insight that several participants were looking to the future and when it might be necessary to hold discussions related to ending the Fed’s balance sheet reduction effort.

Yield are climbing again today, however. The 2-yr note yield is up five basis points to 4.37% and the 10-yr note yield is up seven basis points to 3.98%. An acceleration in the year-over-year rate of CPI inflation in Germany in December (to 3.7% from 3.2%)  and the ADP Employment change and Weekly Initial and Continuing Jobless Claims reports are behind the bump in yields.

ADP estimated that 164,000 jobs were added to private-sector payrolls in December (Briefing.com consensus 114,000) following a downwardly revised 101,000 (from 103,000) in November. Most of that gain (155,000) came from the service-providing sector; additionally, job gains were seen across small (74,000), medium (53,000), and large (40,000) establishments.

Initial jobless claims for the week ending December 30 decreased by 18,000 to 202,000 (Briefing.com consensus 220,000) while continuing jobless claims for the week ending December 23 decreased by 31,000 to 1.855 million.

The key takeaway from the report — and the ADP number — is that the labor market is still in good shape, which is good news for the economy if not for the market’s aggressive rate-cut outlook.

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Originally Posted January 4, 2024 – Dealing with some rate-cut angst