Stocks climbed while bond yields sank as an unexpected inflation slowdown bolstered bets the Federal Reserve’s aggressive hiking cycle is now over — and the next move will be a cut in mid-2024.
More than 95% of the S&P 500 companies rose, with the gauge up about 2%. Tesla Inc. led gains in megacaps and Nvidia Corp. extended its rally into a 10th straight session. Financial shares also saw a big advance, especially regional banks — which jumped 7%. The Russell 2000 index of small caps added 4.5%. Two-year yields plunged 20 basis points to around 4.85%. The dollar fell 1%, the most since January.
The consumer-price index also added to the “Goldilocks narrative,” with the economy remaining resilient and disinflation allowing the central bank to ease policy in 2024. Fed swaps indicate the odds of another hike in the current tightening cycle have fallen to almost zero — with the market now pricing in a 50 basis-point rate cut by July from the current level of 5.25-5.5%.
To Chris Zaccarelli at Independent Advisor Alliance, whether or not the economy can stay out of recession remains to be seen, but the market should continue to rally as investors begin to accept the view that higher rates are off the table.
“The last of investors not convinced the Fed is done are likely ‘throwing in the towel’,” said Bryce Doty at Sit Fixed Income Advisors. “The next Fed action is more likely to be a cut next summer than another rate increase.”
The drop in inflation suggests that recent monetary policy has been doing its job, which makes the prospect of a “soft landing” ever more likely, according to Richard Flynn at Charles Schwab UK. The news reinforces the probability that officials will “hold off” from further rate hikes, he noted.
“With the US economy holding up, the inflation data are ‘soft-landing nirvana’ for the equity markets,” said Neil Dutta, head of economics at Renaissance Macro Research.
An intact disinflationary process means that the Fed can “sit tight for now” — which would lower the risk of an “overly restrictive policy”, according to Lauren Goodwin at New York Life Investments.
Still, “we’d caution investors before getting too enthusiastic,” Goodwin noted. “Financial conditions are now easing again, which keeps the Fed on guard and highly data dependent.”
Equities have rallied in November on bets the Fed is done with rate hikes, with the S&P 500 up more than 7% in the span — and heading toward its best month since October 2022.
In the past 22 years, when the S&P 500 was up 5% or more by mid-November, the remainder of that year was positive every single time, according to data compiled by Bloomberg. Go back 50 years, and that setup was positive 26 out of 30 times, with the decline in the four exceptions being 1% or less.
“We need to see more months with soft inflation data, but the stock and bond market is celebrating today,” said Gina Bolvin, president of Bolvin Wealth Management Group. “We’re set up nicely for a year-end rally.”
Meantime, investors turned the most bullish on bonds since the global financial crisis amid “big conviction” that rates will move lower in 2024, according to the latest Bank of America Corp. fund manager survey. The poll showed investors were dumping cash to hold the biggest overweight position in bonds since 2009.
Bond giant Pacific Investment Management Co. — among the many whose expectations for a rally this year were disappointed — is renewing the call for 2024.
Bonds “have rarely been as attractive as they appear today” relative to stocks, Pimco managers Erin Browne, Geraldine Sundstrom and Emmanuel Sharef say in a new report predicting “prime time” for the asset class in 2024.
Traders are also keeping an eye on another slew of Fed speakers to get their thoughts on the latest data and how that would impact the central bank’s next steps. Fed Bank of Richmond President Thomas Barkin said he’s not convinced inflation is on a clear path toward the central bank’s 2% target despite “real progress” curbing price pressures in recent months.
Elsewhere, oil rose on bets that a halt to interest-rate increases would improve the outlook for demand, with a weaker dollar making commodities priced in the currency more attractive to buyers. Gold and copper also gained.
- Home Depot Inc. narrowed its guidance for a decline in this year’s profit and revenue as home-improvement demand wanes.
- Boeing Co. extended its successful order haul on the second day of the Dubai Air Show, winning a deal from Ethiopian Airlines for more narrow- and widebody aircraft while rival Airbus SE continued to chase an increasingly elusive deal with Emirates.
- Glencore Plc will buy a majority stake in Teck Resources Ltd.’s coal business, ending a months-long saga that transfixed the mining industry and setting the stage for the commodity giant to exit the coal business itself.
- Siemens Energy AG has secured a €15 billion ($16.2 billion) deal with the German government, its biggest shareholder Siemens AG and a consortium of banks, as the troubled manufacturer weathers massive losses at its wind-turbine unit.
Key events this week:
- China retail sales, industrial production, fixed-asset investment, Wednesday
- Japan GDP, industrial production, Wednesday
- UK CPI, Wednesday
- US retail sales, business inventories, PPI, Empire manufacturing, Wednesday
- Target earnings, Wednesday
- China new home prices, Thursday
- US initial jobless claims, industrial production, Thursday
- Walmart earnings, Thursday
- US President Joe Biden and Chinese President Xi Jinping expected to speak at APEC leaders summit, Thursday
- Cleveland Fed President Loretta Mester, New York Fed President John Williams and Fed vice chair for supervision Michael Barr speak, Thursday
- Bank of England deputy governor Dave Ramsden and ECB President Christine Lagarde speak at event, Thursday
- US housing starts, Friday
- US Congress faces a midnight deadline to pass a federal spending measure, Friday
- ECB President Christine Lagarde speaks, Friday
- Chicago Fed President Austan Goolsbee, Boston Fed President Susan Collins and San Francisco Fed President Mary Daly speak, Friday
Some of the main moves in markets:
- The S&P 500 rose 1.8% as of 12:08 p.m. New York time
- The Nasdaq 100 rose 1.9%
- The Dow Jones Industrial Average rose 1.4%
- The Stoxx Europe 600 rose 1.3%
- The MSCI World index rose 1.9%
- The Bloomberg Dollar Spot Index fell 1%
- The euro rose 1.5% to $1.0862
- The British pound rose 1.6% to $1.2479
- The Japanese yen rose 0.7% to 150.73 per dollar
- Bitcoin fell 0.7% to $36,254.33
- Ether fell 0.8% to $2,044.39
- The yield on 10-year Treasuries declined 18 basis points to 4.46%
- Germany’s 10-year yield declined 11 basis points to 2.60%
- Britain’s 10-year yield declined 16 basis points to 4.15%
- West Texas Intermediate crude rose 0.8% to $78.92 a barrel
- Spot gold rose 0.9% to $1,964.32 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Vildana Hajric, Jan-Patrick Barnert, Allegra Catelli and Edward Bolingbroke.