The latest set of economic numbers support a ‘goldilocks’ scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons… both of which I think are unlikely before June.
"Interest Rates / Bonds"
Inflation Trending Lower… But More to Do
Today we received CPI for October. It was slightly softer than expected and continues to (slowly) trend lower. That’s good news. However, stocks jumped on the data and feel its enough for the Fed to end further hikes. What’s more – the market is now pricing in rate cuts as early as March. That feels like a dangerous (aggressive) assumption… I think there’s a lot more work to do. Remember – getting inflation down from 4% to 2% is where the hard work begins. Wage growth for example remains at 4.2% YoY.
Are Bond Yields and Oil Cracking?
Today was an important day in the bond market. The US Treasury auctioned $40B of 10-Year notes. Coming into the auction – I was worried there would not be a decent bid. For example, if we faced further buyer’s strike – these yields were likely to resume their path higher. However, we saw the opposite. The 10-year yield drifted lower. So what does this tell us about future economic growth? Are investors worried? In addition, the price of WTI Crude is also sharply lower… back below US$80/bbl on concerns of weakening demand. Are equities slow to connect the dots – as they are headed in the opposite direction.
For Now, A Slowing Economy is Good News
A weaker than expected October payrolls print sent stocks flying and bond yields sharply lower. The S&P 500 finished at 4358 – a whopping 5.9% for the week. It was the market’s best week for the year. Renewed bullish enthusiasm was mostly due to investors betting the Fed is done. And that makes sense. For example, if employment, growth and inflation continue to soften – there’s every possibility the Fed has hit its terminal rate. However there is a caveat. Not only will the Fed need softer economic data – they are hoping the bond market continues to keep financial conditions tight (i.e. bond yields stay high)
For a full list of posts from 2017…