Search:dow

A weird week of macro data - strong jobless claims but weak labor market data from UMich; housing starts soared but new home sales crashed; rapidly slowing inflation all driven by goods deflation (as crude prices begin rising again). So macro surprises have flatlined for a week or two - even as financial conditions continue to loosen dramatically...

Source: Bloomberg

As Goldman's Chris Hussey notes, "This week we got further data suggesting that we have not only landed softly, but that the principal concern of a successfully soft landing economy -- that growth takes off again, triggering renewed inflation, and prolonging the Fed hiking cycle -- is likely behind us."

Small Caps soared almost 3% this week (its 6th straight week higher), now up 25% from the lows on Oct 27th. The Dow lagged on the week, but still managed gains while Nasdaq and S&P rallied for the 8th week in a row (the longest streak since 2017)...

Today was 0-DTE selling pressure again, like Wednesday (but on a smaller scale) and Thursday (which worked briefly but then was face-ripped).

The black line is the S&P 500. The red line is 0-DTE options delta flow...

Source: SpotGamma

Wednesday, it worked...

Source: SpotGamma

Thursday, it almost worked...

Source: SpotGamma

'Crap' stocks - ok, profit-less tech - surged this week, but not before Wednesday's 0-DTE-inspired crash wrecked some dreams...

Source: Bloomberg

...and no this is not the same chart, 'most shorted' stocks also followed the same pattern with a big squeeze at the cash open every day this week...

Source: Bloomberg

...and the biggest losers have become the biggest winners as financial conditions have eased...

Source: Bloomberg

The Bullish consensus is getting serious...

Source: Bloomberg

Are investors really excited about The Fed being forced to massively slash rates?

Rate-cut expectations surged to a new high this week, now pricing in 163bps of cuts in 2024...

Source: Bloomberg

If The Fed needs to cut rates that far, that fast, it won't be because of slowing inflation - it will be because of accelerating depression... which ain't good for stonks.

Nevertheless, the market is now pricing a 90% chance of The Fed starting to cut rates in March...

Source: Bloomberg

So much for the FedSpeak trying to jawbone the market back from its extreme reaction to Powell.

They better hope that cyclical inflation doesn't 'cycle' back higher (cough Red Sea cough)... and/or that acyclical inflation falls fast...

Source: Bloomberg

Treasuries were mixed this week with the short-end the best performer by far but the long bond was the only segment of the curve to end higher on the week...

Source: Bloomberg

Which bull-steepened the curve quite notably on the week...

Source: Bloomberg

The dollar fell to its weakest since July, down for the 5th week in the last 6...

Source: Bloomberg

Ethereum soared today relative to bitcoin, but only enough to bring it back to unchanged (relative to bitcoin) on the week...

Source: Bloomberg

On the week, both ETH and BTC were up around 4% (while Solana soared 35%), with BTC holding around $44,000...

Source: Bloomberg

Gold is up 4 of the last 5 days, rising for the 5th week of the last 6 and back above $2050 spot to three-week highs...

Source: Bloomberg

Oil prices rose for the second week in a row, after seven straight weeks lower. The 3% jump in WTI was the best week since mid-October (finding resistance at $75)...

Source: Bloomberg

Finally, from a valuation perspective, things are getting a little pricey. It now takes the average American 1279 hours of work to earn enough to buy The Dow...

Source: Bloomberg

That's quite a jump from the 225-hour average from 1965 to 1995 before Greenspan unleashed the activist Fed.

Via SchiffGold.com,

The US stock market had a potentially significant day on Wednesday. Markets have been rallying on the hope of interest rate cuts in the near future. But Fed officials have been trying to walk back those expectations. Did the central bankers manage to steal the Santa Claus rally? In his podcast, Peter Schiff talks about the recent moves in the stock market.

Wednesday started with another in a string of 52-week highs for all the major stock indices. Markets rallied early in the day despite FedEx dropping after a big revenue miss.

This should throw cold water on this parade that the economy is in great shape because the fact that a lot less stuff is getting shipped is an indication that maybe the consumer is running out of gas. He’s tapped out. He’s leveraged to the max. He has all this credit card debt. People are starting to have to pay their student loans again.”

Nevertheless, the stock market shrugged off that bad news.

Markets also essentially ignored a really bad Treasury bond auction.

But later in the day, markets tanked. After making a record high, the Dow Jones finished down 475 points. The NASDAQ fell 1.3%. The Russell 2000 dropped nearly 2%.

Not only did these indexes close negative after making 52-week highs, but they also closed below the low from the previous day. This is known as an outside reversal. Peter said outside reversal days are particularly relevant when they snap a significant trend.

The market was going higher day after day after day — a relentless string of gains. … All of a sudden, you get this reversal where the market just collapses. The sellers came out in droves and there were no buyers.”

Peter called it “potentially a very ominous technical sign” that we’ve seen a top. Whether it is a short-term or long-term top is hard to say.

It could be the beginning of a correction, not necessarily a new bear market where you see the markets down 20%.

So, what caused this reversal?

Peter said he thinks it was due to the Federal Reserve backtracking after signaling upcoming rate cuts at the December FOMC meeting.

Ever since Powell let the cat out of the bag and basically conceded that rates are coming down, and they’re coming down substantially, the markets got ahead of it. I think the mood on Wall Street was, ‘Happy days are here again. We’re going back to zero! We’re going back to QE.’ Because that is the experience of the past. Once the Fed starts cutting, they don’t stop until they get to zero. That’s what they’ve done in the past. So, why would anybody assume that the future is going to be any different?”

Keep in mind that Powell & Company went from saying the committee wasn’t even talking about rate cuts at the November meeting to projecting rate cuts one month later.

In one meeting, it was a complete pivot on rate cuts. Why shouldn’t the markets expect that a similar pivot is coming with respect to quantitative easing? That’s the big enchilada that coming — a return to QE.”

This brings back memories of 2019 when the Fed started expanding its balance sheet in response to the big stock market selloff in the fall of that year – long before COVID reared its ugly head.

If they couldn’t shrink the smaller balance sheet, it’s even less likely that they can shrink this even larger balance sheet — especially in an election year.”

Peter said you can typically count on the Fed to help an incumbent president in an election year.

So, the markets are getting in front of this. Obviously, it’s an election year. They want to put lipstick on the pig of an economy that is Bidenomics. What can the Fed do? Well, let’s start cutting rates. Let’s go back to quantitative easing. Let’s goose the markets. Let’s get people excited and let them believe that the economy is getting better. And maybe they think, ‘Who cares about these inflation numbers because we’ve just got to make it through the election.'”

But then you had a bunch of Fed members walking back the doveish rhetoric and calling rate cuts into question.

Since that’s the only thing the market has got going for it… It’s all about liquidity. It’s all about inflation. That’s the story. It’s an expensive market and the economy is weak. That’s the hope that the markets have been bid up on.”

Peter said the moves on Wednesday may indicate the markets have surrendered that hope – at least for the time being.

Unless the Fed wants to come to the rescue of the market by now reversing those calls, which it might do if the markets fall enough, we could see some significant downside in the markets given how big this run has been and how the only thing that’s propped it up is a bunch of hot air.”

US equity futures and global markets reversed their torrid rally as bonds rallied and the dollar gained after a fresh batch of soft inflation data in the UK boosted the likelihood of interest-rate cuts, but also underscored the risk of an economic downturn. As of 7:45am, S&P eminis dropped 0.2% after the index notched a record high for the third successive session, with European and Asian stocks in the red. Germany 10-year yields dropped below 2% for the first time in nine months after a report showed producer prices fell more than expected in November. Meanwhile, British 10-year borrowing costs slid as much as 11 basis points as slower-than-expected inflation boosted the case for multiple rate cuts next year. Treasury yields slid four basis points to 3.9%, down more than 40 this month. Brent jumped above $80 to a 3 week high after the US considered possible military strikes against Houthi rebels in Yemen, in a recognition that a newly announced maritime task force meant to protect commercial ships in the Red Sea may not be enough to eliminate the threat to the vital waterway. US economic data includes 3Q current account balance (8:30am), November existing home sales and December consumer confidence (10am).

In premarket trading, FedEx shares tumbled as 10% after the parcel company’s fiscal second-quarter profit came in below expectations, with analysts pointing to a particularly disappointing performance from the Express air-freight unit, which was hit by slowing volumes. Brokers added that the company’s outlook lacked visibility, with Citi calling it “vague.” Here are some other notable premarket movers:

• Cinemark dropped 2.3% as Wells Fargo downgrades the movie theater operator to underweight from equal-weight based on an unattractive box office outlook.
• Clear Channel shares rose 4.2% after Wells Fargo Securities raised the recommendation on the advertising company to overweight from equal-weight. The broker says the upgrade comes as the company returns to growth.
• Coupang shares slid 1.2% as UBS downgrades its rating to neutral, awaiting greater clarity on the e-commerce company’s strategy.

Markets have rallied hard in recent weeks after the Fed's dovish pivot which helped put the tech-heavy Nasdaq 100 on course for its best year since 1999, while the S&P 500 is less than 1% off its record closing peak. Bulls got fresh encouragement Tuesday from Richmond Fed President Thomas Barkin, who suggested the US central bank would “respond appropriately” if recent progress on inflation continued. Money markets now price almost a 50% chance of an euro-area rate cut by next March, while seeing an even higher probability of a Fed cut that month. That said, even Powell's unofficial mouthpiece, Nikileaks, aka Nick Timiraos is now warning that the market that it has gone up too far, too fast.

Since their meeting last week, Fed officials have been flummoxed that investors expect even faster and deeper cuts. The result: Confusion over when and how quickly the Fed might cut.

“The Fed shouldn’t have been surprised by the market running with it.” https://t.co/Tth5I2NzXe

— Nick Timiraos (@NickTimiraos) December 20, 2023

At the same time, investors are also having to balance rate-cut optimism against the risk of economic recession. Recent data has backed that view, especially in the euro area, with analysts surveyed by Bloomberg forecasting the first recession since the pandemic.

“It’s hard to see such a fast and deep rate-cutting cycle as the market appears to assume, unless the base case is a deep recession,” said Daniele Antonucci, chief investment officer at Quintet Private Bank.

Investors are also starting to weigh risks stemming from potential shipping delays and freight cost increases, as companies divert cargoes away from the Red Sea to avoid militant attacks. This rerouting will mean higher shipping costs and longer delivery time, and has helped push brent crude prices above $80 for the first time in 3 weeks.

The big econ news overnight was the latest confirmation that a global deflationary wave is being unleashed, with UK reporting inflation that came in below the lowest estimate.  The UK data “adds to the mounting evidence that global inflation has begun to crumble on a broader basis,” said Christoph Rieger, head of rates research at Commerzbank.

While the data initially boosted European stocks, gains on the Stoxx 600 index quickly evaporated, though London’s export-oriented FTSE 100 benchmark held its gains as the pound tumbled on the prospect of looser monetary policy. The telecom sector lead the advance, boosted by Spain’s Telefonica. The health-care sector underperforms, meanwhile, dragged lower by Argenx, which plunges after disappointing drug trial data. Among single stocks, shipping companies Hapag Lloyd AG and AP Moller-Maersk A/S rallied as militant attacks continued to disrupt Red Sea container traffic. Here are the biggest movers Wednesday:

• Telefonica shares jump as much as 7.2% after the Spanish state unveiled a plan to buy up to 10% in the telecom operator to counter stakebuilding by Saudi Telecom Co.
• Intertek gains as much as 3.7% after BNP Paribas Exane double-upgrades to outperform, saying in note that consensus is now overly bearish on margin outlook
• Raiffeisen Bank surges 12%, the most since March 2022, following its deal to buy a stake in Austrian construction company Strabag, with Citi upgrading the stock to buy from neutral
• British stocks rally as data showed inflation in the UK slowed far more than expectations, driving European stocks closer to early 2022 record, with landlords leading the advance
• Indivior gains as much as 4.5% after settling a drug patent dispute with rival Actavis, which now is granted a license to the patent that would enable Actavis to launch a generic variant
• Ionos gains for a ninth day as Morgan Stanley says the webhosting firm has delivered “two early Christmas presents” in strong guidance on Tuesday and last week’s debt refinancing.
• Argenx shares plunge as much as 35% after its key drug Vyvgart (efgartigimod) failed another trial, a second setback in less than a month for the Brussels-listed biotech firm
• DS Smith falls as much as 2.8% after UBS downgraded the paper and packaging company to neutral from buy, saying the downgrade reflects weaker containerboard prices
• Inficon shares fell as much as 5.3%, the most in two months, after the Swiss vacuum instruments manufacturer was downgraded to reduce from add at Baader Helvea
• Resurs Holding drops as much as 8.3% after SEB Equities downgrades the retail finance company to sell from hold, giving the stock its only negative analyst rating

In FX, GBP/USD falls as much as 0.7% to below $1.27 after UK CPI data, EUR/USD down 0.3%; the Bloomberg Dollar Spot Index is largely unchanged as the US currency’s gains versus European currencies are offset by its slide against the yen. The Japanese yen is the best performer among the G-10 currencies, rising 0.3% versus the greenback on false expectations that the BOJ will end its negative rate policy in the coming months which has supported the yen. The dollar has been struggling as investors seek more guidance from the Fed on how soon it will begin cutting rates next year as inflation slows; however Chicago Fed’s Goolsbee said on Tuesday that the market may be getting ahead of itself when it comes to rate cuts.

“Speculative bets on a BOJ policy change are likely to ease for now,” said Fukuhiro Ezawa, head of financial markets in Tokyo at Standard Chartered Bank. “Markets price in deep Fed rate cuts, weighing on the dollar” against peers including the yen, he said

In rates, the yield on the 10-year US Treasury slips 4bps to 3.88%, its lowest since late July. Traders are betting that the Fed will cut rates by 150bps by the end of 2024, compared with around 140 bps on Tuesday. UK gilts rallied while the pound drops after data showed UK inflation slowed more than expected in November, fueling bets on interest rate cuts by the Bank of England next year. UK two-year yields fall 15 basis points to 4.14%, a seven-month low.

In commodities, oil extended its recent rally amid prospects of more disruptions in the Red Sea, while the US weighs military strikes on Houthis. Brent jumped above $80 to a three week high. Brent March call options in the $90s were active again on Tuesday as traders continue to weigh the risks to traffic in the Red Sea. WTI’s second-month 25-delta put skew was the least bearish since mid-November. Brent’s prompt spread climbed to the strongest since Dec. 5, while its Dec.-Dec. spread was the firmest this month.

Bitcoin (+0.6%) and Ethereum (+1.2%) extended gains as BTC rose back over USD 43k. BlackRock, Nasdaq, SEC met regarding a Bitcoin (BTC) ETF, via CoinDesk

Looking to the day ahead now, and data releases from the US include the Conference Board’s consumer confidence for December, existing home sales for November, and the Q3 current account balance. In the Euro Area, there’s the European Commission’s preliminary consumer confidence indicator for December, and there’s also the UK CPI and German PPI readings for November. From central banks, we’ll hear from the Fed’s Goolsbee and the ECB’s Lane.

Market Snapshot

• S&P 500 futures down 0.2% to 4,812.50
• STOXX Europe 600 little changed at 476.63
• MXAP up 0.5% to 165.32
• MXAPJ up 0.2% to 515.45
• Nikkei up 1.4% to 33,675.94
• Topix up 0.7% to 2,349.38
• Hang Seng Index up 0.7% to 16,613.81
• Shanghai Composite down 1.0% to 2,902.11
• Sensex down 1.1% to 70,636.67
• Australia S&P/ASX 200 up 0.7% to 7,537.88
• Kospi up 1.8% to 2,614.30
• German 10Y yield little changed at 1.99%
• Euro down 0.2% to $1.0961
• Brent Futures up 0.8% to $79.87/bbl
• Gold spot up 0.1% to $2,041.67
• U.S. Dollar Index little changed at 102.26

Top Overnight News

• Bond yields across the euro region fell on Wednesday as worsening economic data and slowing inflation underscored expectations for interest-rate cuts next year.
• UK inflation slowed far more than economists forecast in November, a surprise that prompted traders to boost bets the Bank of England will soon have to abandon its higher-for-longer narrative on interest rates.
• Attacks in the Red Sea linked to the Israel-Hamas war will cause shipping delays and drive up the price of goods, bringing a new inflation risk to the economy.
• Jonathan Hoffman, John Bonello and Jonathan Tipermas share more than just similar first names. They’re the driving force behind a gigantic wager on government debt that’s been giving regulators sleepless nights.
• Donald Trump is ineligible to serve as US president because of his actions inciting the Jan. 6, 2021 attack on the US Capitol, Colorado’s highest court found, in an unprecedented ruling that’s headed for the US Supreme Court.
• Throngs of consultants wearing Western attire have become a common sight in the lobbies of Riyadh’s plushest hotels as Crown Prince Mohammed Bin Salman embarks on a multi-trillion dollar plan to wean Saudi Arabia off oil. In recent months they’ve been joined by another cohort of besuited individuals: fund managers, keen to get an early foothold in the next big emerging-market growth story.

A more detailed look at global markets courtesy of NEwsquawk

Asia-Pac stocks traded mostly positively following the tailwinds from Wall Street, although newsflow overnight was on the quieter side amid the pre-Christmas lull. ASX 200 saw its upside supported by the Energy and Metals sectors, whilst Tech lagged with shallower gains. Nikkei 225 surged as the index reacted to BoJ Governor Ueda's dovish press conference following the unchanged announcement yesterday. Hang Seng and Shanghai Comp traded mixed with the former's gains spearheaded by large caps with US listings, including Alibaba, JD.com, and Baidu. Mainland China was subdued after PBoC maintained its Loan Prime Rates as expected and despite more liquidity injections by the central bank.

Top Asian News

• PBoC maintained its 1-year and 5-year LPRs at 3.45% and 4.20% respectively, as expected.
• PBoC injected CNY 134bln through 7-day reverse repos at 1.80% and CNY 151bln via 14-day reverse repos at 1.95%; both rates maintained
• The Japanese government is to raise its long-term interest rate estimate to 1.9% for FY24 from 1.1% in FY23, according to Nikkei.
• Japanese Cabinet projects that income will increase more than prices in FY24, according to Nikkei.
• State-backed developer China South City averts default on July 2024 note after consent from bondholders, according to SCMP.
• RBNZ Governor Orr said interest rates are restricting spending and levels of core inflation remain too high, according to the Parliamentary hearing. He noted that Q3 GDP was surprisingly subdued, and inflation remains too high and the committee remains wary of ongoing inflationary surprises. He said the neutral interest rate is now 2.5%.
• New Zealand DMO and fiscal update: gross bond issuance for four years to June 2027 now totals NZD 136bln, up from NZD 129bln in the budget. 2023/24 gross bond issuance increases to NZD 38bln from NZD 36bln in budget. Treasury sees GDP growth in Q4 23 and through 2024.
• Japan is to draft an initial FY24 budget of JPY 112tln, via Kyodo News
• Japanese government is to lower the scheduled sales of JGBs to market by 11.2% from FY23 plan to JPY 171tln in FY24/25, via Reuters citing a draft

European bourses, Eurostoxx50 (-0.2%), are marginally weaker having spent much of the morning the green; the FTSE 100 (+0.8%) outperforms post-UK CPI. European sectors are mixed with Energy outperforming lifted by gains in underlying Crude prices and Telefonica (+5%) helps lift Telecoms; Technology narrowly lags. US Equity Futures are lower across the board as the Santa Rally comes to a pause, ES (-0.2%); FedEx (-9.9%) extends losses in the pre-market post-earnings.

Top European News

• ECB's Nagel says there is a high probability that the interest rate peak has been reached, according to t-online; would say to everyone who is speculating on an imminent interest rate cut: be careful, some people have already speculated.
• France and Germany see an EU deal on fiscal rules on Wednesday, according to Bloomberg.
• Bank of France Survey: Expectations for inflation one year out ease to 3.5% in Q4 (prev. 4%); 3.5% increase in wages (prev. 3%)

FX

• DXY propped up by the softer Pound and Euro, though with gains capped by upside in the Yen; within a 102.14-34 range.
• The Pound is the G10 laggard post-CPI, falling to a session low of 1.2648.
• EUR is weighed on by the firmer Dollar, with softer German PPI unhelpful for the Single-Currency while EUR/GBP action offers only marginal respite.
• The Yen is the best performer amongst the G10s, paring back some of yesterday's BoJ's induced losses, but yet to test 143.00.
• PBoC sets USD/CNY mid-point at 7.0966 vs exp. 7.1300 (prev. 7.0982)

Fixed Income

• USTs are modestly higher in tandem with Gilts as markets await the US 20yr auction and further speak from Fed's Goolsbee.
• Gilts outperforms after cooler-than-expected UK CPI, adding to dovish expectations for 2024; gapped higher by almost 100 ticks and thereafter eclipsed 103.00.
• Bunds are bid in conjunction with Gilts and after its own softer Producer Prices metrics; German 10yr yield sub-2.0% for the first time since March.

Commodities

• WTI and Brent (+1.2%) are bid having spent the overnight session relatively indecisive; specifics have been light and largely led by geopolitical themes.
• Spot Gold (-0.1%) resides on either side of the unchanged mark, holding on to the prior day's gains; Base metals are generally in the green, though with gains capped amid poorer sentiment in China overnight.
• Intensive talks are underway on a potential second Gaza truce, via Reuters citing sources; envoys looking at which hostages could go free.

Geopolitics

• US reportedly weighs whether to attack Houthis beyond defensive task force and possible strikes on Houthis in Yemen considered, according to Bloomberg sources; no decision made yet on striking Houthis. The US and its allies are considering possible military strikes against Houthi rebels in Yemen, in recognition that a newly announced maritime task force meant to protect commercial ships in the Red Sea may not be enough to eliminate the threat to the vital waterway. Planning is underway for actions intended to cripple the Houthis’ ability to target commercial ships by hitting the militant group at the source.
• Israel is offering to pause the fighting in Gaza for at least one week as part of a new deal to get Hamas to release more than three dozen hostages, according to Axios sources.
• Malaysia bans Israeli-based shipping firm Zim from its ports, with the ban set to take effect immediately, according to the Malaysian PM.

US Event Calendar

• 07:00: Dec. MBA Mortgage Applications -1.5%, prior 7.4%
• 08:30: 3Q Current Account Balance, est. -$196b, prior -$212.1b
• 10:00: Nov. Home Resales with Condos, est. 3.78m, prior 3.79m
  • Nov. Existing Home Sales MoM, est. -0.4%, prior -4.1%
• 10:00: Dec. Conf. Board Consumer Confidence, est. 104.5, prior 102.0
  • Dec. Conf. Board Present Situation, prior 138.2
  • Dec. Conf. Board Expectations, prior 77.8

DB's Henry Allen concludes the overnight wrap

The relentless market rally has continued over the last 24 hours, with investors remaining confident that central banks will soon pivot towards rate cuts, despite the pushback from several officials over recent days. In fact, yesterday saw the S&P 500 (+0.59%) hit another 23-month high, which leaves the index less than 1% beneath its all-time closing peak back in January 2022. That also means t he index has now risen by +15.8% in less than two months, and we haven’t seen an advance that fast since March-May 2020, back when the S&P 500 was recovering from the initial Covid selloff. At the same time, sovereign bonds have continued to rally, and overnight the 10yr Treasury yield has fallen to its lowest level since July, at 3.91% .

This growing anticipation of rate cuts was supported by Richmond Fed President Barkin, who said that “If you’re going to assume that inflation comes down nicely, of course we would respond appropriately”. That helped push Treasury yields lower, and offered support for the idea that the Fed would cut rates if inflation fell, since otherwise it would mean that policy was becoming more restrictive in real terms. But we also had a more hawkish take from Atlanta Fed President Bostic, who said that “there’s not going to be urgency for us to pull off our restrictive stance”, expecting only two rate cuts in 2024, rather than the three rate cuts that the median dot suggested. Both are voting members of the FOMC in 2024.

Against that backdrop, investors continued to price in a strong chance of a Fed rate cut by March, with the probability moving up from 75% to 83% yesterday. And it was the same story for the ECB, where the chance of a March cut rose from 35% to 49%, even as Latvia’s central bank governor said that “it is too early to declare victory over inflation” .

Those moves led to a s izeable rally in sovereign bonds in the European session. Yields on 10yr OATs (-8.5bps) fell to their lowest level since February, those on 10yr gilts (-4.3bps) fell to their lowest since April, and those on 10yr BTPs (-13.4bps) were at their lowest since December 2022. 10yr bund yields (-6.3bps) also fell back, although they were just above their closing level from Friday, at 2.01%. Over in the US, 10yr Treasury yields had traded nearly -4bps lower early on in the US session but were flat by the close (-0.1bps) at 3.93%, but overnight they’ve since fallen -2.4bps to 3.91%.

That growing conviction about rate cuts came despite some hawkish-leaning data that was released yesterday. For instance, Canada’s CPI print for November was stronger than expected, with headline CPI remaining at +3.1% (vs. +2.9% expected). Moreover, US housing starts also surprised on the upside, hitting a 6-month high in November as they rose to an annualised rate of 1.56m (vs. 1.36m expected). The release meant that the Atlanta Fed’s GDPNow estimate rose another tenth yesterday, and it now sees US Q4 GDP expanding at an annualised +2.7% pace .

The prospect of faster growth alongside rate cuts proved supportive for equities, and the S&P 500 (+0.59%) advanced for the 8th time in the last 9 sessions. It was a broad-based advance, with 23 of the 24 S&P 500 industry group up on the day and both the FANG+ index (+0.51%) and the Dow Jones (+0.68%) reaching all-time highs. Small-cap stocks did particularly well on the day, and the Russell 2000 (+1.94%) surpassed its recent peak in July to close at its highest level since August 2022. Meanwhile in Europe, the STOXX 600 (+0.36%) closed at a 22-month high, with its YTD gain now standing at +12.27%.

That optimism has been echoed in Asia overnight, where most indices have seen a decent rally. That includes the KOSPI (+1.65%), the Nikkei (+1.51%) and the Hang Seng (+1.08%), although the CSI 300 (-0.50%) and the Shanghai Comp (-0.42%) have seen an underperformance. That follows the move by Chinese banks to leave the 1yr and 5yr loan prime rate unchanged. Otherwise, US equity futures are broadly flat this morning, with those on the S&P 500 up +0.03%.

Meanwhile in Japan, sovereign bond yields have continued to fall after the BoJ’s decision to leave its policy unchanged yesterday, with the 10yr JGB yield down a further -6.4bps overnight to its lowest since July, at 0.55%. As we were going to press yesterday, Governor Ueda said in the press conference that there “isn’t much likelihood of us suddenly announcing that we’ll raise rates a month in advance”, so that’s a different approach to other central banks like the Fed, who tend to signal their moves in advance. Looking forward, investors still see a serious probability that the BoJ will move away from their negative interest rate policy over the months ahead, and currently they price in a 39% chance of a shift in January, and a 75% chance of a move by April. This morning, the Japanese yen has stabilised against the dollar, strengthening +0.10% to trade at 143.69 per dollar as we go to press. However, Japanese banks have continued to lose ground amidst the continuation of low borrowing costs, and the TOPIX Banks Index (-0.19%) is on track to lose ground for a 5th consecutive session, and is currently at its lowest level since July .

In the commodity space, oil prices advanced yesterday, with Brent crude up +1.64% to $79.23/bbl and WTI up +1.34% to $73.44/bbl. The two oil benchmarks have risen by +8.2% and +7.0% respectively over the past week, with the main driver being the pause of much commercial shipping via the Red Sea in response to recent attacks and rising perceptions of geopolitical risks.

To the day ahead now, and data releases from the US include the Conference Board’s consumer confidence for December, existing home sales for November, and the Q3 current account balance. In the Euro Area, there’s the European Commission’s preliminary consumer confidence indicator for December, and there’s also the UK CPI and German PPI readings for November. From central banks, we’ll hear from the Fed’s Goolsbee and the ECB’s Lane.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Speculation has its own expiration dynamics, and they don't depend on us recognizing speculative excess for what it is. They will unravel the excesses regardless of what we think, hope or deny.

The Federal Reserve has so completely normalized speculative excess that these extremes are no longer even recognized as extremes. Rather, they are simply "the way the world works." This Empire of Speculation is complex and plays out on multiple levels.

The primary mechanism is obvious to all: whenever the equity market falters, the Fed unleashes a flood tide of liquidity, i.e. fresh currency, that rushes into the market at the top--corporations, banks and financiers--because the Fed distributes the fresh liquidity solely into the top tier of market players.

The Fed's ability to conjure up liquidity in a variety of ways appears limitless: expand its balance sheet (QE), use the reverse repo market and bank reserves, launch new lending mechanisms, and so on.

The Fed has long relied on useful fictions to mask its agenda. One useful fiction is that the Fed is independent and apolitical. Despite being risibly shopworn, this mirth-inducing fiction is still dutifully trotted out by every Fed chairperson.

Another useful fiction is that the Fed's mandate focuses on promoting stable expansion of the economy, not the equity market. This masks the reality everyone knows and acts on, which is the market isn't a reflection of the economy, it is the economy.

This is why the Fed will pursue ever greater policy extremes to rescue the market from any decline and keep equity markets lofting higher: should the market falter, the economy will quickly follow, as the animal spirits of the market are now the primary engine of expansion.

The Fed's focus on inflating the equity markets entered a new phase of policy extremes in 2008, a phase that continues to this day. The Fed's willingness to "do whatever it takes" time and again has created a feedback loop that has expanded the influence of the market on the economy and the Fed's influence on the market, to the point that the market is now keyed to every Fed utterance and policy tweak.

The market rallies on the expectation of Fed pauses, Fed easing, Fed bank bailouts, and so on: every Fed action sparks a rally because everyone knows there are no limits on what the Fed will do to further inflate the equity market.

Speculative gains are not actually growth in the sense of increasing productivity and wages in the real economy. Much of what passes for "growth" is actually profiteering by corporate monopolies, corporate trickery (stock buybacks, etc.) that boost earnings per share without actually producing more goods, services or productivity, corporations reaping the gains of offshoring production, financiers using the Fed's flood tide of liquidity to skim gains while producing nothing, and so on.

This is not the "growth" generated by the expansion of productivity, it's a phony simulacra of "growth" generated by Fed-liquidity-driven skims and scams. The only possible outcome of this dynamic is the soaring concentration of wealth and income in the hands of those with access to the Fed's flood tide: the already-super-wealthy, which is exactly what has happened.

These dynamics have drawn the entire populace into the Fed's speculative casino. With the real economy's productivity stagnating, the only way to get ahead is to join the crowd in the casino. Everybody's playing, one way or another. In the 1929 analogy, every shoeshine boy and taxi driver was working a hot new speculation. Now it's every Uber jockey and delivery driver.

As we may soon rediscover, there is a limit on Fed policy extremes in support of ever-higher equities: inflation. The more liquidity the Fed pumps into unproductive speculation, the more it stokes inflation, which is driven by expanding the flood tide of currency and credit without actually boosting productivity.

Global scarcities, either contrived or the result of depletion, are another source of inflation the Fed can't control. A third source of inflation is investment that is required by factors other than boosting productivity, such as pollution remediation, reshoring of production, etc.

All three of these sources of inflation manifested in the 1970s, as I have often explained. Now they're manifesting again.

Denial doesn't negate system dynamics or history, but denial does offer the false solace of comforting illusions. And so speculators are piling in on the Pavlovian expectations that the Fed will push interest rates back to near-zero and continue to find new ways to unleash new flood tides of liquidity: Dow 100,000, indeed.

Except this time around, inflation will bite the Fed's head off and swallow it whole. And since we as a nation have compensated for stagnant productivity by borrowing tens of trillions of dollars in public and private debt, the Volcker Fed's policy of jacking rates high enough to suppress the expansion of currency will crush debtors large and small like cockroaches.

Economists love to discuss "Fed policy errors" in the 1920s, but they rarely mention the dominance of massively excessive debt and speculation, excesses that had to be unwound one way or another. Absent policies designed to deflate these unproductive excesses slowly, a stock market crash and tsunami of defaults were the only mechanisms available to mitigate the excesses.

Feeding speculative manias and relying on their permanent expansion as the foundation of economic "growth" is folly, and the only possible outcome is the unraveling of the Empire of Speculation.

The echoes of 1929 abound, but nobody's paying attention because speculative extremes have been normalized by 15 years of Fed policies. What speculative excess? This is just normal market functioning: the Fed hints at easing and the market soars to new highs.

The 1970s offers a roadmap of how belief in the omnipotence of the Fed and the permanence of Bull Markets fades. Every rally is assumed to be a new Bull Market, and it takes repeated losses to empty out the casino.

All speculation is inherently unproductive, and we've persuaded ourselves that getting rich from speculation is an excellent substitute for increasing productivity. But this is mere rationalization, a self-serving comforting illusion that is bound to unravel, either slowly or in a spectacularly unexpected fashion.

Unfortunately, we can't act on what we no longer even recognize. Speculation has its own expiration dynamics, and they don't depend on us recognizing speculative excess for what it is. They will unravel the excesses regardless of what we think, hope or deny.

*  *  *

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century. Read the first chapter for free (PDF)

Become a $1/month patron of my work via patreon.com.

Subscribe to my Substack for free

Authored by Matthew Piepenburg via GoldSwitzerland.com,

As my last report for 2023, I wanted to hit the big issues blunt in the face—from debt and sovereign bond markets to themes on the USD, inflation, risk markets and physical gold.

This will not be short, but hopefully simple.

No one likes hard macro facts, especially at holiday parties, so I’ll sip my champagne in silence and share my views here instead.

Powell: From Hawk to Dove to Jive Turkey in 30 Days

So, hawkish Powell is now talking about dovish rate cuts in 2024.

Powell, however, is neither a hawk nor dove but more of a jive turkey or, in the spirit of Christmas, a cooked goose.

The sad but simple fact of the matter is that our Fed Chairman, like so many of the so-called “experts,” has a genuine problem with admitting failure or speaking honestly—which is why I recommended long ago to bet against the experts…

Looming Rate Cuts? No Surprise at All

For any who have been following my blunt views on US debt markets, bond volatility, interest rate gyrations and Fed-speak vs. Fed-honesty (our first oxymoron), this pivot toward rate cuts should come as zero surprise.

ZERO.

As indicated many times, rising rates break things, and so many things have broken (banks, Gilts, USTs, the middle class…) that even Powell can’t deny this anymore.

Powell, as I wrote earlier this year, has only been raising rates so that when the denied recession that we are already in becomes an official 2024 recession according to the always too-late NBER, at least the Fed will have something to cut.

Powell, of course, is a politician, and like all politicians, has learned the art of bending truth to straighten his career and legacy.

It’s The Recession, Stupid

But even Powell, despite all his rhetoric on (mis) hitting target inflation via his pseudo-Volcker-esque profile of “higher-for-longer,” always knew (and still knows) that America is already in a hard-landing recession thirsty for cheaper rates and even more debt…

The evidence of this recession, as I’ve said, is literally everywhere—from classic economic indicators like the yield curve (inverted), the Conference Board of Leading Indicators (dipped below 4% threshold last December) and a dramatic 4% decrease in the M2 money supply (inherently deflationary), to basic Main Street indicators like record-breaking bankruptcy filings, ongoing lay-offs, equally record-breaking car and credit card delinquencies—all encapsulated by the Oliver Anthony Indicator.

Debt-Rollovers Needed Lower Rates

But there are more reasons these rate cuts are of no surprise…

Never forget this: The Fed serves Wall Street (and capital gain taxes), not Main Street. And Wall Street is screaming for help.

The over-valued and cheap-credit-addicted S&P 500 (led by 7 names only) is riddled with countless zombie enterprises staring down the barrel of $740B in debt rollovers in 2024, and another $1.2T in 2025—all at currently Powell-higher rates.

That is a problem.

And Uncle Sam is looking at 30% of his $34T in IOUs (about $17T worth) re-pricing over the next 36 months at equally higher, Powell-driven rates.

That too is a problem.

And as I warned: Rates would have to be cut to avoid a market bloodbath and sovereign bond debt trap.

Et voila—here comes Powell announcing rate cuts. Real shocker…

A Mug’s Game

Does such foresight make me/us psychic? Blessed with mystical powers?

Hardly.

Predicting any near-term move in the markets or even in the minds of a Fed official (which are essentially now the same thing), is indeed a mug’s game.

No one can pick the day, hour or even month of a watershed move.

But for those who follow deficits, debt markets and hence bond dysfunction, the signals (i.e., basic math) can offer pretty sound ideas of what’s coming.

Such instincts are nothing radical or genius, but boil down to common sense, something most of us own. You know, like how most of us reach for an umbrella on a cloudy day—because, well: Clouds warn of rain ahead.

What the Storm Clouds (and Debt Bubbles) Portend

The clouds we’ve been tracking in the bond markets were easy to see for everyone willing to open their eyes–except perhaps for politicians, who prefer to keep their well-made heads buried in the sand.

For months and months, we’ve been pounding our patient little fists that debt actually matters, and hence by extension, bond markets actually matter.

With this simple, (i.e., common sense) premise in mind, we thus had very little long-term faith in the short-term words or policies of our fork-tonged and financially-trapped central bankers about “higher for longer.”

Like Luke Gromen, and frankly even Charles Calomiris of the St. Louis Fed, we saw (and warned over and over and over) that the cost of Uncle Sam’s own IOUs under Powell’s “higher-for-longer” meme-war against inflation would fail.

Why?

For the simple reason that rising debt costs would force the Fed to reduce rates and eventually print more money just to pay for Uncle Sam’s True Interest Expense.

That’s called “Fiscal Dominance.”

In short, and despite all of Powell’s rate-hiking and chest-puffing, we saw a rate pause, as well as rate cuts, as effectively inevitable.

As warned, Powell then paused the rate hikes. And now, as 2023 winds toward a disastrous end, he is talking of rate cuts for 2024.

Again: Hardly a shocker. And here’s why.

Hitting a Wall of Fiscal Dominance

When official (as opposed to honest) CPI inflation falls while interest rates (as best measured by the yield on the unloved 10Y UST) rise, then “real” (i.e. inflation-adjusted) rates go positive and north.

And when real rates approach 2%, this means debt becomes really painful for companies, individuals, and, of course, broke governments like the U.S.

The rest of the world knows this too, which is why central banks have been dumping Uncle Sam’s unloved USTs (red line) and stacking gold (blue line), as they’d rather own real money than a declining asset from a bad credit.

This global dumping of USTs pushed bond prices down and hence yields and rates up, which meant Uncle Sam’s interest payments only got worse—i.e. $1T a year.

That stings.

And even poor old Janet Yellen, having slithered from a position as Fed Chair to Treasury Secretary (how’s that for insider power?) realized there was a real problem with Powell’s rate hikes.

As she confessed just last week: “Rising real rates may impact Fed decision on rate path.”

Well, as we seasoned bond experts say on Wall Street: “Duh.”

Meanwhile, the Financial Media Gets It All Wrong: The Truth About US Bonds

But despite this moment of “duh,” the main stream financial media, which like all media, has simply devolved into a propaganda arm of a centralized government with a weaponized Dollar and a “puppet-ized” president, tried to tell the world that November was a banner month for Uncle Sam’s bonds, which saw its best month in 40 years.

This, they boasted, was proof that America’s IOUs were loved IOUs.

As usual, however, just about everything the mainstream media says is approximately 180 degrees from the facts and hence truth…

November’s historical yield compression and bond price rise, for example, was not the result of resurging natural demand, but rather a spike in un-natural DC intervention at its best and most desperate.

For the fifth time in four years, and reminiscent of the already forgotten Treasury General Account tricks of last October, the Fed and US Treasury Department were hard at work at trickery hiding in plain sight.

That is, panicking central planners saw a need for liquidity that wasn’t coming from the rest of the world.

They thus saved the 10Y UST from an over-supply sky-fall by simply over-issuing more bonds from the short end of the yield curve to buy time.

And at the same time DC was shuffling risk from the 10Y to the 2Y UST, they got even more clever by sucking liquidity out of the Treasury General Account to the monthly tune of $150B to keep bond yields from spiking out of the Fed’s increasingly weakening control.

And that, folks, is what made November an historical month: Not a natural rebirth of global demand for Uncle Sam’s IOUs, but a series of loosening tricks wherein DC drinks its own expensive Kool aide and calls it a national victory.

But if, according to consensus, November was such a Fed and bond victory, why is the December version of a once-hawkish Powell now talking dovishly about more rate cuts in 2024?

From Fake Victory to Open Decline: No Good Options Left at the Fed

The simple answer is because America is not in a period of victory, but one of open and obvious decline clear to everyone but the word-heavy yet math-challenged media, the deficit-popular-politicos and the cornered central-bankers.

And boy do I mean cornered.

Why?

Because as warned month after month, debt destroys nations and hence corners central planners, who have nothing but bad options to address very bad math.

That is, if they don’t cut rates and print more fake money, risk assets tank and the economy falls with it into a hard recession.

But if central bankers loosen policy to save the system, they kill the currency’s inherent purchasing power, which is precisely what Powell will do next—as all broke nations sacrifice their money to cover their butts…

Very Scary Math

To keep this sensational but all too sad point real, just consider the facts rather than the drama of a nation whose debt profile makes growth impossible.

Current US debt to GDP has crossed the Rubicon of 100% well into the 120% range; our deficit to GDP is at 8% and rising; our Net International Investment Position (i.e., piggy bank of foreign assets) is at negative 65%; our public debt is at 34 TRILLION and counting, and according the Congressional Budget Office, Uncle Sam is about to spit out at least another $20T in US IOUs over the next 10 years, and this modest number (?) is assuming no intervening recession…

But who will buy Uncle Sam’s IOUs to cover his skyrocketing deficits?

According to simple math and hard facts, the answer since 2014 is basically no one but the Fed…

Such facts have the global chief economist at Citi Group worried and wondering, and it’s never a good thing when even the beneficiaries of a Fed-driven debt bubble are worried about the size of that bubble…

Meanwhile, combined public, corporate and household debt in the debt-imprisoned land of the free is around $100T.

I don’t even know how to write this number out, but I can assure you that no one in DC knows how to pay it either.

This, of course, is a problem…

Collateral Debt Damage—The Dollar, Inflation, Markets Etc.

All of this debt, alas, brings us to the corollary topics of inflation and the next chapters of the USD, because debt and currencies, like just about everything else, including risk assets, are all connected and inter-twined.

That is, if one understands debt, one can see the patterns of broader markets—past, present and future.

The USD: Relative Strength Aint Enough

When it comes to the USD, let’s not kid ourselves: The world still needs it. 70% of global GDP is measured in USDs and 80% of global trade is settled in Dollars.

And as Brent Johnson’s milkshake theory reminds, there is a great big straw (“sucking sound”?) of global demand for USDs coming from Euro Dollar markets, derivative markets and oil markets.

I agree that this super straw (or better yet, global “sponge”) is enormously powerful, and hence the need for Dollar liquidity is a massive tailwind for the USD.

But… this massive tailwind is not an immortal tailwind.

De-Dollarization: More Than Many Think

Evidence of increasing de-dollarization post-US-Russia sanctioning (and Dollar-weaponization) is not merely a bearish meme but an open and undeniable reality.

China and Russia are moving ever more toward oil purchases in CNY (which Russia then converts into gold on the Shanghai Gold Exchange/SGE) while an exponentially increasing number of bilateral trade agreements among the BRICS+ nations are now happening OUTSIDE of the USD.

Just as Nixon’s de-coupling of the gold-standard in 1971 lead to a slow death by a thousand cuts of the USD’s inherent purchasing power (a 98% loss when measured against gold), the weaponization of the USD will lead to a similar (but slow) death by a thousand cuts of the USD’s global hegemony (when measured against a world turning away from the debt-backed rather than gold-backed USD).

We warned of this from day 1 of the sanctions against Russia.

A Supreme Dollar Losing Respect

For now, however, the USD is still supreme, but unlike Brent Johnson, I don’t see even its relative strength pushing the DXY to 150.

This is for the simple reason that even Uncle Sam knows that the rest of his global friends and enemies can’t afford to pay-back $14T in Dollar-denominated debt at such a level without having to dump more of their foreign held USTs (about $7.6T worth), which would crush UST pricing and lead to skyrocketing (and unsustainable) UST yields and rates for Uncle Sam himself.

In short: Even Uncle Sam fears rising rates and a too-strong USD.

Such a fear of rising rates along with the reality of growing US deficits (and hence a growing need for more US IOUs) will soon lead to an over-supply/issuance of USTs down the road.

And the only buyers of those USTs to control yields/rates will be the Fed, not the rest of the world (See graph above…).

That kind of bond buying with money created out of thin air kills a currency.

No Milkshake Straw for USTs = Mega Money Printing Ahead

Thus, while the milkshake theory correctly sees immortal global demand for USDs, there is no similar straw (or demand) for USTs.

This means the Fed will have to print trillions of more Dollars to buy its own sovereign bonds, an inherently inflationary policy which weakens rather than strengthens the Dollar longer term.

This is why Powell’s “pause,” and now “cutting” in 2024 will eventually be followed, in my opinion, by “mega printing.”

After all, “pause, cut and print” is the pattern of debt- cornered central bankers, and eventually (despite TGA and short-duration bond tricks) Powell will need massive amounts of mouse-click money to monetize Uncle Sam’s sickening (and growing) deficits.

We saw this exact pattern between 2018 (QT) and 2020 (unlimited QE).

The end-game is thus more money creation, more money debasement and hence more inflation.

But First the Deflation

But before then, we are marching into an “official” recession in 2024, and recessions are inherently dis-inflationary if not outright deflationary.

Again, the inflation-deflation debate is not a debate but a cycle.

Historically, moreover, the dramatic declines in M2 ALWAYS result in deflation. Always.

And More Risk Asset Bubbles?

As for our stock and bond bubbles, they certainly like cheaper debt (i.e., lower rates) and mouse-clicked trillions (i.e., QE).

For now, markets are expecting (pricing in) the former and waiting for the latter, which can and will make them giddy.

With about 25% of US GDP sitting in cash equivalents, Powell’s 2024 projected rate cuts will send a lot of that money into the market bubbles, sending asset inflation even higher, which means more needed tax revenues for Uncle Sam.

If the DXY stays low, markets will rise. And if the Fed is accommodative, markets will rise. This includes BTC.

It’s just that simple: Tight policies are a market headwind, loose policies are a market tailwind.

This is because capitalism died long ago and the Fed is essentially the de facto market-maker for the S&P, Dow & NASDAQ.

But trying to determine, or time, how long this charade of Fed-driven asset bubbles can avoid a sickening moment of mean-reversion is the topic of another article.

Gold: The Brightest Star on the Tree

Gold, of course, merely sits back and patiently watches all these debt forces—and hence inflationary and currency debates/reactions–with a calm smile.

Why?

Well, gold loves chaos, and thanks to decades and decades of policy makers who believed they could solve one debt crisis after the next (think Paul Krugman) with more debt, the financial/recessionary chaos (as per above) is literally everywhere.

Thus, even when rates are officially positive, gold reached record highs, despite my own argument that gold loves negative real rates.

And even with a relatively strong USD and DXY, gold has reached record highs, despite the standard view that gold favors a weak USD.

And even with yields spiking, gold has reached record highs, despite another common misconception that investors prefer higher-yielding bonds over zero-yielding “pet rocks.”

Gold, in other words, follows more than just conventional indicators. It has a profile, life and history of its own, one which few investors understand unless their aim is solvency and wealth preservation.

In fact, the easiest way to understand gold is that it’s more loyal than paper money.

Despite all the endless debating, and all the spot-price manipulationsin the OTC markets and all the crypto comparisons and fiat-money apologists, the fact is that informed investors, like a growing list of informed countries, just don’t trust the US, its bonds or its fiat-Dollar like they used do.

They’d rather have gold:

And in the years ahead, they’ll get a fairer gold price on the SGE than in London or New York, which means the West will soon have to behave on actual supply and demand principles rather LBMA bank price manipulations…

Iconic America has devolved from a gold-backed currency and the world’s leading creditor, manufacturer and trade partner to a debt-soaked America with a gold-welched-dollar and is now the world’s biggest debtor, weakest manufacturer and open loser to a trade war with China.

This is hardly a proud evolution from its Greatest Generation…

In short, the iconic America is no more, and there’s a far better Sharpe Ratio in gold than there is in topping risk portfolios…

Like it or not, believe it or not: Gold is rising because the home of the world reserve currency with its shining façade of free market price discovery has lost its way, replacing capitalism with feudalism and altruistic leadership with egotistic opportunism.

If WE know this. So too does gold.

Did Powell get a 'Biden-esque' tap on the shoulder?

The Powell pivot begins.

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 two weeks can make. https://t.co/Vox8LKSgf0

— Nick Timiraos (@NickTimiraos) December 13, 2023

The Dow hit a new record high after The Fed signaled - via its 'dot plot' - that it has pivoted from a pause, dovishly delivering what the market was pricing in (and Powell didn't even get close to trying to walk back the exuberance)...

Fed Chair Powell said absolutely nothing about the massive easing of financial conditions (the tightening of which was the reason for them to pause at the September meeting).

Source: Bloomberg

And then pivoted to a major rate-cut trajectory for 2024 (election year).

• In Sept, 5 Fed members expected three cuts or more

• In Dec, 11 Fed members expect three cuts or more.

Source: Bloomberg

Of course, Powell explained, when asked about the election year:

"We don't think about political events, we just can't do that" as he frontloads rate-cuts (from 2025) ahead of 2024 presidential elections.

As The Fed shifted dovishly towards the market, the market shifted even more dovishly - now pricing in 150bps of rate-cuts in 2024 (an election year) - bringing forward the cuts from 2025 (a non-election year)...

Source: Bloomberg

However, amid all the excitement, on a real rate basis, The Fed's policy restriciveness will be basically unchanged by the end of next year IF their inflation and rate forecasts are met

Bonds ripped higher (in price) with the short-end outperforming (2Y -27bps, 30Y -12bps)

Source: Bloomberg

The 2Y Yield plunged over 30bps from the intraday highs - the largest daily drop since the SVB crisis in March. Other than that, you have to go back to the GFC (2008) to see moves like this...

Source: Bloomberg

Interestingly, 10Y Yields tumbled to 4.00% and found support there (which stalled stocks)...

Source: Bloomberg

The yield curve (2s30s) massively bull-steepened...

Source: Bloomberg

Is 4.00% 10Y the 'fear' level that prompts equity bulls to lose faith in the soft-landing/goldilocks narrative? Stocks were on a roll though and closed near their highs with Small Caps up 3.5% and the rest of the majors up around 1%

The Fed triggered the biggest stock-buying program since Nov 2022...

Source: Bloomberg

This was the second biggest short-squeeze in stocks since Nov 2022...

Source: Bloomberg

The Magnificent 7 stocks did not exuberantly participate in the yield-collapse the way you think they should have...

Source: Bloomberg

But retail faves are #winning...

Source: Bloomberg

Meanwhile, over in Homebuilder fantasy-land - new highs as the housing market collapses 'because, hey, The Fed will slash rates next year, right'... except the only thing that will drive that kind of a massive sudden rate cut is a massive sudden recession... which is not good for homebuilders...

Source: Bloomberg

The dollar puked to late November lows...

Source: Bloomberg

Bitcoin ripped up towards $43,000...

Source: Bloomberg

Gold soared over $40, back above $2,000...

Source: Bloomberg

Oil prices rallied (WTI back above $69) but were relatively subdued compared to the rest of markets...

Finally, VIX remains extremely low, but, as Goldman highlighted today, it should be 5-8 points higher based on recent economic data...

As they said: We believe that index options prices are much lower than they should be; however, volatility tends to decline at this time of the year, making it difficult to recommend buying VIX.

Reality set in this week that the 'goldilocks' narrative is not compatible with the massive rate-cuts priced-in for next year.

As Goldman warned:

"...it may be hard to justify more than 75bp of cumulative easing without weaker growth. A recession could clearly motivate a much deeper easing cycle, but a high weight on that outcome is not consistent with other asset prices, or with our own central case.

...

For that reason, the market is moving into territory where we think it will become more difficult for US rates to rally unless the growth picture deteriorates more than we, and other markets, expect.”

Stocks mixed-ish, Bonds mixed-ish, Commodities down, Crypto up, & Dollar up as Rate-Cut hopes faded this week (from 140bps in 2024 to 112bps)...

Source: Bloomberg

On the macro side - it was all 'soft' with a little firming in 'hard' data: Inflation expectations (survey) down along with gasoline, Services (survey) data up, labor market mixed (JOLTS weak but unemployment lower), consumer sentiment (survey) soars, and geopolitical risk mixed (US pressures Israel for ceasefire but military action in Yemen looms).

Source: Bloomberg

Good news, bad news, no news; Didn't matter as stocks chopped around wildly squeezing and un-squeezing this week. Small Caps and Mega-Cap tech outperformed while The S&P managed to get green for the week but The Dow struggled all week...

Every time The Dow got green on the week, selling pressure hit...

A chaotic week for 'most shorted' stocks, crashing up and down like a whore's drawers...

Source: Bloomberg

After an ugly open on Monday, Magnificent 7 stocks soared 4.5% off the Monday lows, back up near record highs...

Source: Bloomberg

All of which meant hedge funds got it from both ends unable to escape from Friday's carnage...

Source: Bloomberg

Energy stocks were the week's biggest losers while tech and discretionary outperformed...

Source: Bloomberg

We couldn't help but laugh at the surge in regional bank stocks - now back up near post-SVB highs - while their use of the expensive BTFP bailout facility at The Fed surged to a new record $122BN...

Source: Bloomberg

Treasuries were mixed on the week with the short-end underperforming. Only the long-bond managed to close the week higher in price (lower in yield)...

Source: Bloomberg

Which pushed the yield curve significantly flatter (more inverted). This was the biggest weekly flattening since Nov 2022 to its most inverted since Sept....

Source: Bloomberg

The dollar surged higher this week (after three straight weeks down) ...

Source: Bloomberg

Cryptos were all higher this week with Solana outperforming. BTC and ETH were each up around 13%...

Source: Bloomberg

Bitcoin ripped up to $44,000 (its highest since April 2022)...

Source: Bloomberg

Ethereum neared $2400 (its highest since May 2022)...

Source: Bloomberg

Commodities were all lower with Silver clubbed like a baby seal, NatGas ugly, Oil & gold were sold, and copper was the least ugly horse in the glue factory...

Source: Bloomberg

Spot Gold fell back to $2000 today

Source: Bloomberg

Gold's outperformance pushed the gold/silver ratio back to the upper end of its range this year (from the lower end)...

Source: Bloomberg

Oil prices rallied today, ending a 6-day losing streak. WTI found support at $70 (5-month lows)...

Source: Bloomberg

Finally, which comes first - the equity market collapse or global central bank balance sheet explosion?

Source: Bloomberg

Our money's on the former and then the latter and the two meeting in the middle before melting up.

Authored by Lance Roberts via RealInvestmentAdvice.com,

It’s that time of the year where Wall Street polishes up their crystal balls and pin targets on the S&P index for the upcoming year. As is often the case, while Wall Street is always optimistic, the forecasts prove pretty wrong.

For example, on December 7th, 2021, we wrote an article about the predictions for 2022.

“There is one thing about Goldman Sachs that is always consistent; they are ‘bullish.’ Of course, given that the market is positive more often than negative, it ‘pays’ to be bullish when your company sells products to hungry investors.

It is important to remember that Goldman Sachs was wrong when it was most important, particularly in 2000 and 2008.

However, in keeping with its traditional bullishness, Goldman’s chief equity strategist David Kostin forecasted the S&P 500 will climb by 9% to 5100 at year-end 2022. As he notes, such will “reflect a prospective total return of 10% including dividends.”

The problem, of course, is that the S&P 500 did NOT end the year at 5100.

Then, in 2022, Wall Street analysts suggested that 2023 would be a year of meager return of just 3.9% with a median price target of 4000.

Of course, reality turned out to be markedly different.

However, the guessing game is an annual tradition of Wall Street analysts and, as is always the case, to borrow a quote:

“(Market) Predictions Are Difficult…Especially When They Are About The Future” – Niels Bohr

Okay, I took a little poetic license, but the point is that while we try, predictions of the future are difficult at best and impossible at worst. If we could accurately predict the future, fortune tellers would win all the lotteries, psychics would be richer than Elon Musk, and portfolio managers would always beat the index.

However, all we can do is analyze what occurred previously, weed through the noise of the present, and discern the possible outcomes of the future. The biggest problem with Wall Street, both today and in the past, is the consistent disregard of the unexpected and random events they inevitability occur.

We have seen plenty, from trade wars to Brexit, to Fed policy and a global pandemic in recent years. Yet, before those events caused a market downturn, Wall Street analysts were wildly bullish that wouldn’t happen.

So what about 2024? We have some early indications of Wall Street targets for the S&P 500 index, and, as is always the case, they are primarily optimistic for the coming year.

“The estimates from sell-side strategists put the average target for the S&P 500 at 4,836 for the end of 2024, implying an advance of merely 6.3% from Monday’s close, according to MarketWatch calculations of the data (see table below). That is below the average yearly return of around 8% for the large-cap index since 1957 and its year-to-date surge of 18.5% in 2023, according to Dow Jones Market Data.” – MorningStar

Will next year be another bull market year for stocks, or will the bear finally come out of hibernation? We don’t have a clue but can make educated guesses about ranges given current valuations.

Estimating The Outcomes

The problem with current forward estimates is that several factors must exist to sustain historically high earnings growth.

1. Economic growth must remain more robust than the average 20-year growth rate.

2. Wage and labor growth must reverse to sustain historically elevated profit margins, and,

3. Both interest rates and inflation must reverse to very low levels.

While such is possible, the probabilities are low, as strong economic growth can not exist in a low inflation and interest-rate environment. More notably, if the Fed cuts rates, as most economists and analysts expect next year, such will be in response to a near-recessionary or recessionary environment. Such would not support current strong earnings estimates of $220.24 per share next year. This represents roughly 20% from Q3-2023 levels, which is the most recently completed quarter.

Nonetheless, with that said, we can use the current forward estimates, as shown above, to estimate both a recession and non-recession price target for the S&P 500 as we head into 2024. These assumptions are based on valuation multiples within ranges of current market levels.

In the NO-recession scenario, the assumption is that valuations will fall slightly as earnings increase to 22x earnings over the next year. (22x earnings has been the average over the last few years.) The S&P 500 should theoretically trade at roughly 4845 by 2024 based on current estimates. Given the market is trading at approximately 4550 (at the time of this writing), such would imply a 6.5% increase from current levels.

However, should the economy slip into a mild recession, valuations would be expected to revert toward the longer-term median of 17x earnings. Such would imply a level of 3744 or roughly a 17% decline next year.

While an additional 17% decline from current levels seems hostile, such would align with typical recessionary bear markets.

Which would also coincide with Fed rate cuts to offset the deflationary risk to the economy.

However, we must consider one more scenario.

Maybe The Bulls Are Right

We would be remiss in not providing for a bullish outcome in 2024. However, we must consider several factors for that bullish outcome to take shape.

1. We assume the $220/share in year-end estimates remains valid.

2. That the economy avoids a recession even as inflation falls

3. The Federal Reserve pivots to a lower interest rate campaign.

4. Valuations remain static at 22x earnings.

In this scenario, the S&P 500 should rise from roughly 4550 to 5395 by the end of 2024. Such would imply an 18.5% gain for the year. Given the market is up approximately 19% in 2023, such a gain

The chart below combines the three potential outcomes to show the range of possible outcomes for 2024. Of course, you can do the analysis, make valuation assumptions, and derive your targets for next year. This is just a logic exercise to develop a range of possibilities and probabilities over the next 12 months.

Conclusion

Here is our concern with the bullish scenario. It entirely depends on a “no recession” outcome, and the Fed must reverse its monetary tightening. The issue with that view is that IF the economy does indeed have a soft landing, there is no reason for the Federal Reserve to reverse reducing its balance sheet or lower interest rates.

More importantly, the rise in asset prices eases financial conditions, which reduces the Fed’s ability to bring down inflation. Such would also presumably mean employment remains strong along with wage growth, elevating inflationary pressures.

While the bullish scenario is possible, that outcome faces many challenges in 2024, given the market already trades at fairly lofty valuations. Even in a “soft landing” environment, earnings should weaken, which makes current valuations at 22x earnings more challenging to sustain.

Our best guess is that reality lies somewhere in the middle. Yes, there is a bullish scenario where earnings decline and a monetary policy reversal leads investors to pay more for lower earnings. But that outcome has a limited lifespan as valuations matter to long-term returns.

As investors, we should hope for lower valuations and prices, which gives us the best potential for long-term returns. Unfortunately, we don’t want the pain of getting there.

Regardless of which scenario plays out in real-time, there is a reasonable risk of weaker returns over the next year than what we saw in 2023.

That is just the math.