[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The stock market ended higher today, with the 10-year Treasury yield plunging to 3.92%, its lowest level since August. Investors were cheered by a surprise increase in retail sales, which suggested that the economy would avoid a hard landing in 2024.

The bond market seemed to give an assist, as traders priced in more rate cuts for 2034. The Fed signaled that it may lower rates three times next year, after saying just two weeks ago that it was “premature” to talk about easing. What changed in such a short time?

Meanwhile, bank stocks rallied, even as the Fed’s emergency lending facility hit a record high of $124 billion. The Regional Banking ETF soared to levels not seen since the March banking crisis. How does that make sense?

To me, the Fed has given up on fighting inflation, which is likely to get worse as the government keeps borrowing and spending like there’s no tomorrow. The latest data showed that the November budget deficit was a staggering $380 billion, the largest ever for that month, despite a 9% rise in tax revenues.

This fiscal recklessness is happening at a time when interest rates are rising sharply. This is bad news for a government that relies on debt to fund its operations and is probably one of the reasons why the Fed has capitulated to inflation. The government can’t afford high interest rates.

Financial analyst Jim Grant believes that we are in the early stages of a long-term bear market in bonds (higher yields) that will last for decades, regardless of what the Fed does. This means that the only way to escape this vicious cycle is to slash spending.

But will that ever happen?

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[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The Fed gave the markets a big gift by signaling that it will slash rates more than expected next year. The central bank kept the key interest rate unchanged for now, but projected three cuts in 2024, as inflation has cooled down from its recent highs.

This was music to the ears of investors, who have been eagerly waiting for the Fed to ease its monetary policy and boost the economy. The Santa Claus rally may not be over yet.

The Dow, which had suffered its worst year since 2008 due to the Fed’s hawkish stance, soared to a new record high after the announcement. The blue-chip index has outperformed the S&P 500 and Nasdaq in the past month, as hopes of lower rates increased.

The Fed’s dovish turn was also supported by the latest inflation data, which showed that both producer and consumer prices were flat or slowing in November. This eased the fears of runaway inflation that had spooked the markets earlier this year.

However, not everything was rosy in the financial world. Bond yields plunged, as investors rushed to buy safer assets, pushing the 2-year yield down by the most since the banking crisis in March. The 10-year yield found support at 4%.

The stock market rally was also driven by a massive short squeeze, as traders who had bet against the market had to cover their losses.

But the so-called “Magnificent 7 stocks” – the tech giants that had led the market for years – did not join the party.

The dollar took a dive, as lower rates make the greenback less attractive. Oil prices bounced back above $69, as lower rates could boost demand. But the star of the day was gold, which surged 2.3% and beat the major indexes by a wide margin.

The Fed’s sudden change of course on rate cuts in 2024 raises a curious question: “Did someone remind Powell that 2024 is an election year?”

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[Chart courtesy of MarketWatch.com]

1. Moving the markets 

Wall Street shrugged off another inflation report and pushed the major indexes higher, after a sluggish start.

Traders are waiting for the Fed’s decision on monetary policy, which could affect the pace of the economic recovery. The consumer price index, which measures the cost of living, rose 3.1% from a year ago and 0.1% from October. Both figures matched economists’ expectations.

However, the core CPI, which excludes food and energy, edged up 0.2% month over month, as predicted, and stayed at 4% year over year. The Fed will announce its policy stance on Wednesday at 2 p.m. ET.

Most investors expect the Fed to keep interest rates near zero. However, the Fed faces a dilemma. On one hand, financial conditions have eased significantly, suggesting that the Fed’s stimulus is working. On the other hand, the economy has been slowing down, according to the Citi Economic Surprise index, which tracks how data compares to forecasts. Moreover, the Super Core CPI (excluding shelter) rebounded above 4%, indicating persistent inflation pressures.

One bright spot was today’s 30-year bond auction, which sparked a huge buying spree in stocks in the afternoon, ensuring a positive finish. However, short sellers have not given up, but the market has been stuck in a range for most of the month.

Bond yields were mixed, the dollar and gold reacted briefly to the inflation data, and crude oil was the biggest loser, dropping below $69 a barrel.

The Fed is in the spotlight now.

Will Powell stick to his “transitory” inflation story or bow to Wall Street’s pressure?

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[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The S&P 500 ended higher on Monday, after a choppy session, as investors waited for the final Federal Reserve meeting of 2023. The big question is: when will the Fed start to lower interest rates?

The Fed is likely to keep the fed funds rate unchanged in the 5.25%-5.5% range. But Chair Jerome Powell may also signal his readiness to fight inflation in his press conference on Wednesday.

Many traders are betting that the Fed will cut rates by 0.25 percentage points in March. But don’t count on it. Higher-than-expected inflation data could spoil the party and delay the rate cuts.

This week, we’ll get a glimpse of the inflation picture, with the consumer price index on Tuesday and the producer price index on Wednesday.

It was a crazy day on Wall Street, with a lot of action in different markets, as Zero Hedge put it:

Bitcoin got slammed, oil prices dropped and bounced, the ‘Magnificent 7’ stocks stumbled, gold prices fell, and natural gas tanked. Bonds were mixed (yields slightly higher) and the dollar rose a bit.

Bitcoin stole the show today, as it faced a wave of selling pressure and a scathing attack from Elizabeth Warren – who blamed it for everything from climate change to inequality.

The short squeeze was on and off again, following last week’s erratic pattern. Since the last FOMC meeting, financial conditions have eased a lot, which makes me wonder if that will affect the Fed’s thinking on interest rates.

Will Powell stand his ground and defy market expectations on Wednesday? Or will he cave in and give the traders what they want?

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