Weekly Newsletter December 9th to December 13th
RECAPPING LAST WEEK
U.S. equity indices ended the week with mixed performance and Treasury yields rose after the latest CPI data revealed that inflation declines stalled again last month. The S&P500 index fell 0.6%, while the Nasdaq Composite rose fractionally, recovering from earlier losses caused by China’s investigation of antimonopoly law violations by Nvidia. The Russell 2000 slid 2.5% as rising rates weighed on sentiment. Nine of eleven S&P500 sectors were lower, with communications and discretionary the lone bright spots. Crude oil prices shrugged off the collapse of Syria’s regime, jumping 6% after China signaled more stimulus is on the way in 2025. U.S. Treasury yields spiked across the curve after the CPI and PPI reports showed prices rose at a faster pace in November. The 12-month inflation rate stood at +2.7% for consumer prices and +3% for wholesale prices. Still, investors expect the Fed to cut rates at the December 18 meeting, largely due to concerns about the U.S. labor market. Non-farm payroll growth has slowed in recent months, and unemployment claims jumped to 242k for the week ended December 7, well above the 220k forecast. Economists now predict the pace of interest rate reductions will slow considerably in 2025, since inflation remains sticky amid solid economic growth. In other news, U.S. small business confidence reached a three-and-a-half year high on improving economic prospects, while Q3 unit labor costs were revised significantly lower as wage growth slowed. Overseas, Chinese stocks initially surged on Monday after the country’s leaders vowed “more proactive” fiscal measures and “moderately” looser monetary policy to boost consumption. The rally lost steam, however, after details from the two-day Central Economic Work Conference lacked clear direction, which may be forthcoming in March. Additionally, China’s export and import data missed expectations in November. Elsewhere, the European Central Bank lowered interest rates by a quarter point to 3%, with President Lagarde citing risks to economic growth. The Bank of Canada delivered its second 50bps cut in a row, bringing the benchmark rate to 3.25%, and stating that a more gradual approach to monetary policy is likely going forward. Australia’s central bank said it is “gaining some confidence” that inflation is moving toward its target but left rates unchanged at 4.35%. The dovish tilt in the statement moved odds of the timing of interest rate cuts—now thought to potentially start as early as February. Finally, British GDP contracted in October for a second straight month, but the Bank of England is unlikely to lower rates this month due to a recent pickup in inflation. One-year consumer inflation expectations rose to 3.0% from 2.7%, according to a BoE survey.
THE WEEK AHEAD
The last full trading week of this year is packed with important economic data and central bank interest rate decisions. In the U.S., the focus will be on the FOMC meeting Wednesday and on Friday’s core PCE price index. With a quarter-point cut essentially priced in, the Fed’s Summary of Economic Projections and updated dot plot will likely garner the most attention from investors. For 2025, experts now expect rates to fall to around 3.7% by year-end, almost a full point higher than was estimated just three months ago. Meanwhile, the U.S. core PCE reading is forecast to edge up to +2.9% YoY in November, from +2.8% a month earlier. December’s flash PMI results come out today, and the trend in the U.S. and the rest of the world’s developed economies has been a slowing in the formerly hot services sectors. Manufacturing sentiment in the U.S. has been moving toward expansion, narrowing the divergence between the two readings. The rest of the U.S. calendar includes retail sales, housing starts and permits, an updated consumer sentiment reading, and the final estimate of Q3 GDP. Overseas, China releases monthly industrial production and retail sales figures, which are expected to show that the modest recovery is continuing. Although recent inflation and GDP data support a rate hike when the Bank of Japan meets Wednesday evening, current probabilities of this happening are only around 20%. On Thursday, expect the Bank of England to hold rates at 4.75% as businesses fear price increases from employer tax hikes in the new government budget. The UK’s November CPI report arrives a day prior. Last of all, Germany’s no-confidence vote today will likely trigger a snap election in February.
CHART OF THE WEEK
Interest rate trends
The correlation between stocks and bonds has been changing since market watchers began tracking it. Sometimes the change is due to different reactions to market events, while other times it can be the same reaction with different timing. U.S. equities bottomed in October 2022, while Treasury rates put in a local top. Equities had another dip leading into October 2023; at the same time rates put in a secular top. Stock prices have been surprisingly resilient even when rates are rising, but when rates drop, stocks tend to benefit more. When the 10-year Treasury yield index (TNX:CGI) fell sharply from November 15 of this year into early December, the S&P500 index (SPX) gained more than 6%. Last week, when rates rose and retraced 61.8% of that drop, SPX was flat. However, if rates continue to downtrend, that could indicate higher equity prices to close out the year. From a longer-term technical perspective, the larger degree waves have been making lower highs and lower lows and came down from resistance in mid-November. Since then, retracements have all been in Fibonacci ratios, starting with a 38.2% retracement in wave “I” of the rally up labeled “B”. Last week retraced 61.8% of the drop labelled “ii”. Wave ii hasn’t completed yet, but if the 10-year yield tops out below 4.5% ($45 on the index), rates may continue to move lower into year end and early 2025. Confirmation would appear in breaking the low of $41.50 along with RSI moving below the support at 40 on the next move lower.
Source: Charles Schwab Corporation
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