It’s beginning to feel a lot like Christmas

Last week finished with a good old-fashioned “beta rally.” All the stuff that had been lagging the year so far was in high demand, the best example being the Russell 2000 climbing 3% on the day. Financials, property, and consumer discretionary sectors were all strong performers. The bond market is becoming ever more convinced that not only is the Federal Reserve done raising interest rates, but the day when the first cut comes is coming closer. The interest rate-sensitive two-year US treasury yield, offering well over 5% not so long ago, now yields closer to 4.5% after Powell’s latest speech on Friday. Even though Powell seemed to offer little for the doves to feed on in his Friday speech, he also seemed to contradict himself. On the one hand, he refused to rule out further rate rises, on the other talked about policy that is now “well” into restrictive territory, which was the phrase that apparently got equity and bond markets excited. Speculators are placing bets on the first cut coming as soon as March.

Now, one would have expected the US dollar to have weakened in the light of this newfound expectation, but it actually rose on the week, against its basket of other currencies. That bit did not quite fit the pattern of falling interest rates. Gold also hit an all-time high, and dare I mention Bitcoin over 40000 dollars for the first time in over a year. Commodity prices rose, except oil, as the uncertainty around what OPEC will do next on production continues. Janet Yellen, the previous Fed chair and now Secretary to the Treasury, offered her view that the Fed could achieve its goal of a “soft landing”.

This week, the focus will be on the monthly purchasing manager surveys from around the globe. After last week’s lackluster Beige book report, the US PMI will likely report a further slowdown in economic activity this week. The other focus for traders will be the latest jobs data on Friday. Recently, there have been signs that the employment market in the US has been cooling off. Reinforcing that view, the November flash US PMI data revealed that employment across manufacturing and service sectors has declined for the first time since June 2020. Equity and bond markets are now seeing weaker economic news further reinforcing their belief we are coming ever closer to a reversal in US monetary policy. The Citi economic surprise index for the US economy has been drifting lower recently. Weaker economic data has been good news for stocks.

The S&P 500 has enjoyed five straight weeks of rises, and everyone is now looking forward to the festive season. Equity markets are starting the week on a cautious note.