As Jim Nabors, playing the character of Gomer Pyle, would say: “Surprise, surprise, surprise!” The FOMC and Fed Chair Powell did it. They surprised the market yesterday — and pleasantly so — with a dovish-looking pivot that featured a median estimate for a third rate cut in 2024 (versus two previously) and an acknowledgment by Mr. Powell that the FOMC discussed when it would be appropriate to dial back the amount of policy restraint in place.
It wasn’t that long ago that Mr. Powell said the Fed is not even thinking about cutting rates. In fact, he said that after the November 1 FOMC meeting, so, “Surprise!”
This acknowledgment was the primary catalyst for the rally that ensued in both the stock market and Treasury market. It was nice to see that the Fed was looking for an additional rate cut in 2024 than it had been previously, but the fed funds futures market had already been pricing in at least four rate cuts in 2024 before the FOMC announcement and release of the Summary of Economic Projections.
Remarkably, the fed funds futures market is now pricing in six rate cuts in 2024. “Surprise!”
That could be a bridge too far, but the market has never been shy about getting ahead of itself. The Treasury market is certainly relishing the notion of multiple rate cuts and inflation moving back toward the 2.0% target.
The 2-yr note yield, at 5.21% in late October, hit 4.29% overnight, but has moved back to 4.37% following this morning’s economic data (more on that in just a bit). The 10-yr note yield, at 5.02% in late October, saw 3.93% overnight and is at 3.97% now.
Clearly, the momentum trade and short-covering activity isn’t just for stocks, which saw the Dow Jones Industrial Average close at a record high yesterday. There is a yield grab taking place right now in the Treasury market, meaning participants are looking to grab yield while they can, as yesterday’s pivot by the Fed has fostered a sense that the prevailing trend for Treasury yields is going to be lower from then and now.
A lot can happen in the interim to change that thinking, but it is the thinking today and it has been supported by the ECB, the Bank of England, the Swiss National Bank, and the Hong Kong Monetary Authority leaving their key policy rates unchanged, fueling some added hope that they, too, will be entertaining a series of rate cuts in 2024.
Accordingly, sovereign bond yields overnight followed the lead set for them by Treasuries, aiding the risk-on trading that has benefited equities.
Currently, the S&P 500 futures are up 26 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 73 points and are trading 0.4% above fair value, and the Dow Jones industrial Average futures are up 197 points and are trading 0.6% above fair value.
The uplift has been supported by some otherwise pleasing economic data out of the U.S.
Total retail sales increased 0.3% month-over-month in November (Briefing.com consensus -0.1%) while retail sales, excluding autos, increased 0.2% month-over-month (Briefing.com consensus 0.0%).
The key takeaway from the report is that it remains supportive of a soft landing outlook, as the rebound in sales from October reflects an ongoing propensity of consumers to spend on goods.
Initial jobless claims for the week ending December 9 decreased by 19,000 to 202,000 (Briefing.com consensus 222,000). Continuing jobless claims for the week ending December 2 increased by 20,000 to 1.876 million.
The key takeaway from the report is that the level of initial jobless claims — a leading indicator — is a long way still from being associated with levels registered during a recession.
Finally, nonfuel import prices increased 0.2% month-over-month but were down 0.4% year-over-year. Non-agricultural export prices were down 1.0% month-over-month and down 4.5% year-over-year.
The key takeaway from the report is that it supports the notion that inflation pressures — and inflation expectations — should be moderating.
Whether this equity market rally chooses to retrench at some point today remains to be seen. To be sure, based on how the market has behaved since late October, it would be a “Surprise!” if it did.
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Originally Posted December 14, 2023 – Surprise! Surprise! Surprise!
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