U.S. equity indices made a considerable effort to extend the choppy bullish trend from the October 2022 low over the past week, and investors focused on the fervour of a cooling monetary policy regime from the Fed. Comments from Fed Chair Jerome Powell that a reduction in the pace of tightening was ahead, while also warning that the terminal rate would be higher than previously expected was the latest spark that excited investors.

Neither reference was particularly new from the Fed’s forward guidance; however, equity markets extended the rally from the October low, with the S&P 500 advancing above its 200-day moving average for the first time since April. The enthusiasm was quickly questioned when the PCE deflator, the Fed’s favourite inflation indicator, didn’t inspire any follow through despite its cooling, and the NFP surprise beat ultimately cooled the market.

The data published by the U.S. Census Bureau revealed on Monday that new orders for manufactured goods, increased $5.8 billion or 1% in October to $556.6 billion. The print followed September’s growth of 0.3% and exceeded market expectation of 0.7%. New orders for manufactured durable goods in October, was up for the past seven months and had increased $3.0 billion or 1.1% to $277.4 billion.

The business activity in the U.S. service sector continued to expand at an accelerating pace in November with the ISM Services PMI rising to 56.5 in November from 54.4 in October. The reading exceeded market expectations of 53.1.

The inflation component of the survey, the Prices Paid Index, declined to 70 from 70.7, compared to analyst estimates of 73.6. The Employment Index rose to 51.1 from 49.1 and the New Orders Index edged lower to 56 from 56.5.

Monday’s upbeat ISM data followed the stronger-than-expected NFP report, which has also thrown some cold water into expectations for a less aggressive tightening. The much talked about recession is not arriving yet, with Friday’s employment report showing jobs growing solidly in November and unemployment remaining at a 50-year low of 3.7%. This shows that the U.S. economy is resilient and if/when a recession comes it might not be as bad as investors fear.

With wage inflation around 5% it looks like the Fed’s 5% federal funds rate is still too low to curb economic activity. The Fed funds rate might have to get above 5% before it starts to impact the economy.

The Fed is in its pre- FOMC meeting blackout period and is unable to direct expectations before its final meeting for the year scheduled for 13th – 14th of December. The expectation is that it will raise rates again, but by a smaller 50 basis point increment than it has at each of its last four meetings.