We talked about the stock market’s resolve before yesterday’s open and it was on full display again during the course of yesterday’s trading. There were no losses at the close for the Dow, Nasdaq, and S&P 500, only gains. It didn’t matter that they were only modest gains, not when one recognizes how far the indices had already come from their late October lows.
What mattered is that sellers were not calling the shots, because the stock market’s resolve continued to feed a fear of missing out on further gains.
There was some early perturbation in response to a November Consumer Price Index that was not as friendly as market participants had been hoping. That only meant it wasn’t “best friend” material. Overall, it was still considered a friend because inflation at the consumer level did not get worse. Total CPI was up 3.1% year-over-year, versus 3.2% in October, and core CPI was up 4.0% year-over-year, unchanged from October.
A 3.8% drop in WTI crude futures yesterday, however, fostered a trading sense that coming months should see continued disinflation.
The November Producer Price Index perpetuated that sense of things this morning. The index for final demand was unchanged month-over-month (Briefing.com consensus 0.1%), as was the index for final demand less foods and energy (Briefing.com consensus 0.2%).
On a year-over-year basis, the index for final demand was up 0.9%, versus 1.2% in October, and the index for final demand less foods and energy was up 2.0%, versus 2.3% in October.
The key takeaway for the continued disinflation view is that the index for processed goods for intermediate demand was unchanged month-over-month while the index for unprocessed goods for intermediate demand declined 1.4% in November.
This will be viewed as a welcome development by the Fed, but at this juncture, we expect Fed Chair Powell et al to place more emphasis on inflation still being too high and the Fed possibly needing to raise rates again if progress on inflation stalls.
Another point of emphasis is that the Fed is not thinking about rate cuts — at least not to the extent the fed funds futures market is thinking about rate cuts. The fed funds futures market has four cuts priced in before the end of 2024. The Fed’s Summary of Economic Projections in September anticipated only two cuts, so that projection is sure to be a focal point when the updated projections are released today at 2:00 p.m. ET along with the policy directive.
The other focal point — or tonal point — will be how Fed Chair Powell sounds when discussing the seeming disconnect between what the market thinks and what the Fed thinks at his 2:30 p.m. ET press conference. Will he adopt the tough-guy Jackson Hole tone he took in 2022 to rein in the market or will he sound more like the fun uncle who tells kids they must obey their parents while at the same time giving them a wink of the eye?
You don’t have to determine this yourself. The Treasury market, and presumably the stock market, will tell you which guy they think showed up today.
Our expectation is that Mr. Powell will work to tamp down the market’s rate-cut outlook, but what we are left to wonder given how resilient the market has been since late October is, will the market really believe a tough-sounding Powell or will it trade more on its own confidence that Mr. Powell and the Fed will come around soon enough to the market’s view of the world?
So, today will feature two trading markets: the one before the FOMC hoopla and the one after the FOMC hoopla.
Currently, the stock market is on track to show more resolve despite an FY24 warning from Pfizer (PFE). The S&P 500 futures are up 11 points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 56 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 71 points and are trading 0.2% above fair value.
This resolve has been fortified by a further drop in market rates. The 2-yr note yield is down seven basis points to 4.67% and the 10-yr note yield is down four basis points to 4.16%.
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Originally Posted December 12, 2023 – What kind of guy will Fed Chair Powell be today?
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