This morning, futures of all the major indexes are up around the 1% mark, after a tough day Wednesday that marked a pause in the long rally of recent weeks. Today’s pre-market trading appears to represent the current consensus that Fed rate hikes are over and will be followed by reductions in 2024. We have important reports on the U.S. economy to review this morning. At 8:30 A.M. (EST), the Commerce Department released its final revision to the September-period gross domestic product (GDP) estimate. The GDP figure was revised lower, from 5.2% to 4.9%, but that did not materially change the narrative that the economy performed very well last quarter. The report also showed that the core Personal Consumption Expenditures (PCE) Price Index, which excludes the food and energy components, came in at 2.0%, which the market took as another sign that inflation is moderating. The Federal Reserve will be encouraged by this reading as it looks to continue reducing inflation while steering the economy to a “soft landing,” that is, a slowing of growth that does not veer into a recession.
Meanwhile, the Labor Department reported that initial jobless claims for the week ending December 16th totaled 205,000, up 2,000 from the previous week’s revised tally, but still running at a level indicative of a tight labor market. Both the GDP report and the labor market data had to please the Fed, as it is trying to lower inflation (i.e., promoting price stability), while fostering full employment. The equity futures, which were notably higher heading into the economic releases, are still presaging a strong opening when trading kicks off stateside.
The stock market is looking to cap off its seventh-consecutive winning week. The five-day stretch has not brought a lot of major economic news, so investors are continuing to focus on Treasury yields, the Federal Reserve, and the most recent inflation data. Falling Treasury yields—which have moved lower on reports showing that inflation has eased further in recent months, and growing sentiment that central bank policymakers are done raising rates and could very well pivot on the monetary policy front next year—have powered the strong rally in the U.S. stock market since the early days of November. A report yesterday morning showing that inflation in the United Kingdom dropped to a two-year low pushed stocks higher early in the session, but those gains and then some were retraced by the closing bell, with all three of the major averages falling more than 1%. It was the S&P 500 Index’s worst single-day performance since late October. It may have been just the case of the market taking a breather after an extended move higher.
Speaking of inflation, Wall Street and the Federal Reserve will get a key report on price growth before the commencement of trading tomorrow when the Labor Department releases the November Personal Income and Spending report at 8:30 A.M. (EDT). That data will include the latest PCE Price Index reading, which is the assessment of inflation most closely tracked by the Federal Reserve. If that report shows a further easing in the PCE Price Index it could make for another merry session for stocks heading into the long Christmas holiday weekend. Treasury market yields, which fell sharply last week on the latest Federal Open Market Committee (FOMC) decision and central bank commentary, took another step lower this morning with the rate on the 10-year Treasury note at 3.84%. The PCE Price Index data could potentially spark a notable move in the Treasury market tomorrow.
In general, the recent equity market’s Santa Claus rally has been rather encompassing, featuring increased participation from the interest-rate sensitive small-cap stocks, though they pulled back yesterday as senior Fed officials have tried to temper expectations that the central bank will quickly pivot to bringing down the benchmark short-term interest rate. We have also seen increased interest in the utilities and energy sectors, which struggled earlier this year. The noted sharp decline in bond yields has made the higher-yielding utilities more attractive these days to income-oriented investors.
Meanwhile, it has been a volatile few days for oil and gas stocks. Earlier this week, oil prices rallied both here and abroad, pushing the stocks of the oil and gas companies higher. The upward movement in crude quotations was driven by concerns about supplies, as tensions escalate in the Red Sea, a body of water that is crucial to the shipment of oil around the world. The United States and its allies are considering military strikes against Iran-backed Houthi rebels in Yemen, which have been attacking merchant vessels in recent days. Then this morning, oil prices fell on news that Angola is leaving the Organization of the Petroleum Exporting Countries (OPEC) because it says membership is not serving its interests. Given these recent developments, those looking to take a stake in the oil and gas stocks must be willing to withstand some volatility. – William G. Ferguson
At the time of this article’s writing, the author did not hold any positions in the companies mentioned.
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