What a week and what a FED meeting! All markets responded enthusiastically to the FEDs apparent shift of rising rates to possible cuts as soon as March 2024. As always the markets are in front of the Feds thinking more rate cuts are coming vs what the FEDs are saying but a big burden appears to have been lifted off the market’s shoulders…get my take here in this week’s round-up.
WEEKLY SOUND BITES:
US indexes have recorded their seventh consecutive week of gains—the longest streak for the S&P 500 since 2017. The gains lifted the S&P and NASDAQ to 2023 highs and the Dow to all-time highs. Continuing a recent pattern, the week’s gains were also broadly based. The 5.55% surge in the Russell 2000 lifted it out of bear market territory for the first time in over 20 months. Trading volumes were elevated at the end of the week, with the number of shares exchanging hands daily hitting a new high for 2023. And finally, Wall Street’s fear gage, the VIX, fell to its lowest level in the post-COVID era falling to 12.28.
The primary factor driving sentiment appeared to be a more benign inflation environment in the eyes of both investors and Fed Officials. Tuesday’s report on consumer price inflation was roughly in line with estimates, with core (excluding food and energy) inflation staying steady at a year-over-year rate of 4.0%. Wednesday’s producer price inflation report surprised modestly on the downside, with core inflation running at 2.0% for the year, a tick below expectations and its lowest level since January 2021. Retail sales unexpectedly rose 0.3% in November, while October’s decline was revised lower, indicating a strong start to the holiday shopping season.
Stocks had their biggest advance of the week in the wake of the report on Wednesday, which also corresponded with the Feds final policy meeting of the year. They left rates unchanged, as expected, but the quarterly “dot plot” summarizing individual policymakers’ rate expectations indicated that the median projection was for 75 basis points of rate cuts coming in 2024, up from the 50 basis points of easing in their previous projection. Investors also seemed encouraged that Fed Chair “Boom Boom” Powell did not appear to push back on futures markets’ pricing of an aggressive 5 to 6 cuts next year in his post-meeting press conference. Long-term U.S. Treasury yields fell sharply on the inflation data and Fed signals, bringing the yield on the benchmark 10-year U.S. Treasury note below 4% for the first time since the end of July.
The ECB left its key deposit rate unchanged at a record high of 4.0% but cut its inflation and growth forecasts for 2023 and 2024. The bank called for inflation to slow to just below its 2% target by 2026, a move widely seen as paving the way for a reduction of interest rates. It expects the economy to grow 0.6% this year, a tick below the previous projections, and 0.8% in 2024, down from 1.0%. An early estimate of the Purchasing Managers’ Index (PMI) based on the combined output of the manufacturing and services sectors fell to 47.0 from 47.6 in November, a two-month low and a seventh consecutive month below 50, the level that indicates contraction. Also, the BOE kept its benchmark interest rate at 5.25% for a third month running in November, as expected. Official data showed that the UK economy shrank in October by 0.3% sequentially, after rising 0.2% in September. Relative to the three months to July, the UK GDP was flat in the three months to October.
Over in Japan the December PMI data showed that Japan’s private sector experienced a mild expansion in business activity over the month. Separately, the BoJ’s quarterly “tankan” survey suggested growing optimism among Japan’s large manufacturers.
Chinese equities declined as persistent deflationary pressures weighed on the economic outlook. Industrial production grew a better-than-expected 6.6% last month from a year earlier, while retail sales surged 10.1% but missed expectations. The PBOC continues to inject money into their banking system to support their economy.
Enjoy this week’s round-up!
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Trade Smart!
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