The Week in Review 12/18/23
“Why pay a dollar for a bookmark? Why not use the dollar for a bookmark? – Steven Spielberg
What a week!!
Good Morning,
The Dow Jones Industrial Average closed at a new record high on Thursday, building on that during Friday's session, while the S&P 500 closed above 4,700 at its highest level since January 2022.
Friday's close marked seven consecutive winning weeks for the major indices.
Stocks surged after the market learned that the FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%.
This was accompanied by an updated Summary of Economic Projections that featured an improved growth outlook for 2023, a lowered inflation outlook for 2023 and 2024, and a median estimate of three rate cuts in 2024 versus a previous estimate of two rate cuts.
Fed Chair Powell also acknowledged in his press conference that the FOMC discussed when it will become appropriate to begin dialing back its policy restraint.
Notably, however, New York Fed President Williams (FOMC voter) in a CNBC interview seemingly contradicting Mr. Powell's remarks. He said that the Fed isn't really talking about rate cuts right now and that it is premature to think about the timing of rate cuts.
Atlanta Fed President Bostic (2024 FOMC voter) told Reuters, meanwhile, that he expects two rate cuts in 2024, starting in the second half of the year.
It is very important to note that talk of lowering rates has never been part of the Fed narrative until last week’s meeting.
The fed funds futures market had been pricing in two rate cuts in 2024 ahead of the FOMC meeting, but it is now pricing in six rate cuts for 2024 with the first cut coming in March.
Other central banks followed the Fed's lead and left their respective rates unchanged, as well. The ECB left its corridor of key policy rates unchanged, as expected, along with the Bank of England, the Swiss National Bank and Hong Kong Monetary Authority. Notably, however, ECB President Lagarde and officials at other banks indicated that they are further away from rate cuts after Fed Chair Powell disclosed that the FOMC had begun discussing rate cuts.
The Treasury market also had a strong rally in response to the Fed's dovish pivot. The 2-yr note yield dropped 28 basis points to 4.46% and the 10-yr note yield plunged 30 basis points to 3.93%. The 10-yr note yield falling below 4.00% acted as added support for equities this week.
Just about everything came along for the upside ride in the stock market. Only one of the S&P 500 sectors registered a loss -- communication services (-0.1%) -- while the rate-sensitive real estate sector jumped 5.3%.
Other top performing sectors included materials (+4.0%), consumer discretionary (+3.5%), and industrials (+3.6%).
Economic data was mostly consistent with the soft-landing narrative. The November Consumer Price Index was mostly in-line with expectations, although core CPI was somewhat sticky, while the November Producer Price Index showed some welcome disinflation. Retail sales rebounded in November from a slump in October and weekly jobless claims are still running below recession levels.
Consumer prices rose 0.1% in the month of November and 3.1% year-over-year. Core inflation, which excludes food and energy items, rose 0.3% in the month of November and 4.0% year-over-year.
Energy prices continue to drag down the headline number. The category fell 2.3% in November and is down 5.4% year-over-year. Shelter costs continue to be a big contributor to inflation, making up over a third of the index and up 6.5% year-over-year.
All in all, inflation continues to come down, but remains high relative to the Fed’s target. Last Friday, the Congressional Budget Office, a nonpartisan agency, estimated that inflation would drop to 2.1% by the end of next year.
The latter half of the week featured heavier-than-normal volume at the NYSE and Nasdaq due in part to a huge quarterly options and futures expiration on Friday. Increased activity was also related to a rebalance of the S&P 500 and Nasdaq 100.
Market Snapshot:
- Oil Prices - Oil prices settled slightly lower Friday following a see-saw session as traders reconcile mixed signals for future oil demand. West Texas Intermediate crude futures (WTI) fell 15 cents, or 0.21% to close at $71.43 a barrel. Brent crude shed 6 cents, or 0.08%, to close at $76.55 a barrel.
- Gold - Gold prices eked out a weekly rise. Spot Gold fell 0.8% to $2,018.56 per ounce while U.S. gold futures also settled 0.4% lower to $2,035.70. Silver closed out last week at $24.154.
- U.S. Dollar - The dollar slipped broadly after updated interest rate projections showed market rate cuts. The dollar index was up 0.64% and was at 102.61. Euro/US$ exchange rate is now 1.094.
- U.S. Treasury Rates - Treasury yields slipped, adding to its sharp downturn this week as traders brace for possible Fed rate cuts next year. The yield on the 10-year Treasury note was lower by 2 basis points at 3.905%.
- Asian shares were mostly lower in overnight trading.
- European markets are trading mixed.
- Domestic markets are again trading in the green this morning.
This week will be comparatively light in economic news. November’s PCE report will be released on Friday, Q3’s final GDP report will be released on Thursday, and various housing data will be released on Tuesday and Wednesday.
As we prepare for the holidays and enjoy some time with family, we wish you a very Merry Christmas and abundant New Year!
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