Why stop now? This seems to be the unspoken question permeating the stock market, which is on course for its seventh straight week of gains rooted in falling interest rates, rising rate-cut expectations, and steady soft landing hopes.
This week in particular has been a banner week, the cherry on top of the rally that began in late October, as Fed Chair Powell didn’t mince words in suggesting rate cuts were part of the Fed’s thought process at this week’s FOMC meeting.
He didn’t mean the Fed was entertaining a rate cut at this week’s meeting. Instead, he was volunteering that the Fed discussed when the time might be appropriate to dial back policy restraint.
Curiously, New York Fed President Williams (FOMC voter) told CNBC this morning that rate cuts are not the topic of discussions at the FOMC. He emphasized that certain members share their projections, but de-emphasized the notion that the FOMC as a whole was talking rate cuts.
Mr. Williams added that it is premature to even be thinking about the question if the market has it right with its outlook for a March rate cut. The rate cut issue, he said, is not the main question before the Fed.
Alrighty then… so, there you have it. This is the template for the Fed trying to walk back the market’s reaction to its latest decision without actually saying it is doing that. We’ll have to see how the market digests these remarks, but there has been a little bit of indigestion in their wake.
The 2-yr note yield, which is most sensitive to changes in the fed funds rate, moved from 4.41% to 4.50%, and the equity futures retreated from higher levels on this huge quarterly options and futures expiration day, as Mr. Williams was speaking.
Currently, the S&P 500 futures are down one point and are trading in-line with fair value, the Nasdaq 100 futures are up 37 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 24 points and are trading in-line with fair value.
If market participants needed an excuse to take some money off the table, Mr. Williams gave them one. The question now is, will the market believe what Mr. Williams said or will the market believe more strongly in its own rate-cut expectations.
A December Empire State Manufacturing Survey that checked in at -14.5 (Briefing.com consensus 3.0), versus 9.1 in November, is a data point that will have the market believing in itself. A number below 0.0 is indicative of contraction.
Separately, some weak flash manufacturing PMIs for December out of Europe, some weaker-than-expected retail sales and fixed asset investment data for November out of China, and the Bundesbank lowering its 2024 GDP growth forecast for Germany to 0.4% from 1.2% are some added elements that should keep the market thinking about the timing of rate cuts, notwithstanding what Mr. Williams said.
In any case, both the market and the Fed are going to be data dependent for shaping their views. Given how far the stock market and the Treasury market have come since late October, it is pretty clear what view they favor.
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Originally Posted December 15, 2023 – Williams with an attempted walk back
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