– Dow hits record high, S&P just a few percentage points shy of its all-time high

– Fed plays catch up to the market

For a third consecutive meeting, the Fed left its main policy rate unchanged in the 5.25% to 5.5% range.

US Central Bank finally let the genie out of the bottle as it pivoted to a rate cut scenario, making a significant turn on its policy rate decision, essentially admitting that the rate hiking cycle is over.

Dec 1: “It would be premature to … speculate on when policy might ease.”
Dec 13:Rate cuts are something that “begins to come into view” and “clearly is a topic of discussion.”

What a difference 12 days (and one inflation report) can make.

That clear dovish shift from Chair Powell caused markets to rejoice. The DJIA broke 37k for the first time ever.

The S&P 500, a broader and more representative index, also a more widely used gauge for equities, climbed to only a few percentage points away from its highest level on record.

On the back of lower Energy prices, cooling inflation dynamics prompted the Fed to signal that future inflation should decline faster than expected.

Core-CPI-ex Shelter inflation, a lagging indicator that wildly understated true housing inflation, came at 1.4% (below the 2% target by the Fed).

The Lower inflation forecasts will drive the lower Fed Funds Rate for 2024.

Policymakers’ projections of the “dot plot” showed about three 25 basis points (bps) cuts in 2024, but traders are even more aggressive, betting on over twice that many cuts (or 165 bps in total).

Source: The Daily Shot

The Fed capitulates to the markets?

The markets are front-running the Fed. Look at the incredible decline in the 10Y Bond Yields from 5% to 4% in the last weeks.

This caused financial conditions to ease dramatically, which, in turn, turbo-charged equities.

Fixed-income traders also rejoice, sending bond prices up and yields down, with the short end outperforming.

The 2Y Treasury Yield plunged over 30 basis points, the largest drop since the SVB fiasco in March.

Latest Producer Price Index (PPI)

The softer PPI reading confirms the lower trend we’ve witnessed over the past months as the two major indices, the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) index, continued their downward path.

Moderating producer costs could also offer support for future CPI and PCE inflation reports; producers are not facing sharply spiking (input) costs that typically pass on to retailers and, ultimately, the consumer.

Key takeaway:

Inflation has eased faster than expected, opening the door for a more aggressive cutting cycle than initially expected.

However, the magnitude of rate cuts that the market wants are consistent with a possible recession ahead.

The bond market seems to agree with that notion as the yield curve continues flattening, a dynamic that precedes the incoming recession.

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