(Bloomberg) — Treasury bonds extended their November rally, with traders poring through remarks from a series of Federal Reserve speakers and the latest economic data for clues about the central bank’s next moves.
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Just days before the “blackout period,” when Fed officials don’t speak publicly, Gov. Christopher Waller said the recent slowdown could indicate that monetary policy is tight enough to contain still-too-high inflation. With no major shocks, Waller said he was confident the U.S. could pull off a soft landing. Two-year US yields fell below 4.8%. The S&P 500 broke away from session lows.
Speakers also included Fed Bank of Chicago President Austan Goolsbee, who noted that inflation is falling but not yet back on target, and Gov. Michelle Bowman, who said she expects to support further tightening, to bring inflation back closer to the central bank’s target.
“It’s a busy day for Fedspeak,” said Will Compernolle, macro strategist at FHN Financial. “The real focus will be on how much Fed officials push back on growing market confidence that the Fed has reached its final interest rate and that rate cuts are already on the cards for the first half of next year.”
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U.S. consumer confidence rose in November for the first time in four months, helped by more optimistic views on the labor market outlook. Home prices hit a new record high, according to seasonally adjusted data from S&P CoreLogic Case-Shiller.
The good news for investors is that the recession isn’t here yet, making a year-end rally likely, according to Lauren Goodwin of New York Life Investments. In past economic cycles, markets have tended not to price in a recession until jobless claims rose and profits fell completely – signs that the recession has already arrived, she noted.
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“Slight slowdowns in inflation and job growth mean that a ‘Fed relief rally,’ accompanied by rallies in stocks, bonds and credit like the one we are seeing now, can be sustained,” Goodwin said. “Our concern is that this end-of-cycle limbo is no different from those of the past: a Goldilocks moment before the real reason for the moderation in inflation – the slowdown in economic growth and employment – becomes clear in the data.”
The most active investors in the U.S. Treasury market are more optimistic than ever, according to a weekly survey conducted by JPMorgan Chase & Co. since 1991.
JPMorgan’s Treasury client survey for the week ending November 27 found that 78% of active clients were long relative to their benchmark, up from 56% the previous week. None of them were short positions for the second week in a row, representing a net long position of 78%, the largest in the survey’s history. The remaining respondents were neutral.
Bank of America Corp. customers were net buyers of U.S. stocks last week, with institutional and retail investors leading the purchases while hedge funds dumped shares. Clients invested $2.6 billion in U.S. stocks, with inflows flowing into both individual names and exchange-traded funds, quantitative strategists led by Jill Carey Hall said.
The S&P 500’s rally this month is now running out of steam, according to Chris Montagu, a strategist at Citigroup Inc. He said futures flows were “mixed” last week, so net positioning in the benchmark index looked “slightly bearish.”
According to Christian Mueller-Glissmann, strategist at Goldman Sachs Group Inc., the recent sharp drop in year-end volatility offers hedging opportunities given the bleak outlook for stocks.
“Following the recent equity rally, we believe there is an attractive entry point to hedge the risk of a retracement,” he noted. “Cross-asset volatility has continued to decline, supported by markets continuing to move towards the ‘reverse’ Goldilocks backdrop in the US, with inflation normalizing faster than expected and growth remaining robust.”
This decline has further widened the gap with interest rate volatility, which is expected to normalize in 2024, he added.
A Bloomberg Intelligence model called the Market Regime Index, which groups periods into three phases called accelerating growth (green), moderate growth (yellow) and decline (red), has been stuck in the middle for the past nine months. That suggests stock return expectations are likely to remain average until the Fed moves from a rate hike to a rate cut, said Gina Martin Adams, chief equity strategist at BI, and Gillian Wolff, senior associate analyst.
Meanwhile, hedge funds bet on a bullish dollar this month even as the currency has slipped on weaker U.S. economic data and rising expectations that the Fed’s most aggressive rate-hiking cycle in a generation is coming to an end.
According to Commodity Futures Trading Commission data aggregated by Bloomberg, a measure of leveraged funds’ net long positions on the greenback against eight currencies rose to its highest level since February 2022 on Nov. 21. The net long position stood at 103,042 contracts This is just above the previous annual high in April, after reaching its low point in March with a net short position of around 72,000 contracts.
“The US dollar has weakened across the board as the market becomes increasingly convinced that the US Federal Reserve’s next move will be to cut interest rates, possibly as early as the second quarter,” said Fawad Razaqzada, market analyst at City Index and Forex.com.
Company highlights:
Tesla Inc. rose ahead of its long-awaited Cybertruck delivery event on Thursday.
Morgan Stanley fell due to an analyst downgrade.
Micron Technology Inc. fell after slightly raising its revenue forecast and forecasting higher operating costs.
PG&E Corp. announced it will pay a dividend for the first time in about six years as part of the California energy giant’s efforts to restore its financial health after bankruptcy.
Boeing Co. was upgraded to “outperform” by RBC Capital Markets as shares are in the early stages of a “significant shift in sentiment” amid strong demand.
Zscaler Inc., a security software company, confirmed a forecast for billings in 2024 that fell slightly short of estimates at the midpoint.
Bristol Myers Squibb Co. agreed to pay up to $2.3 billion to work with Avidity Biosciences Inc. to develop drugs to treat rare heart diseases.
Reddit Inc. is again in discussions with potential investors for an initial public offering of the social media company, according to people familiar with the matter.
Adobe Inc.’s planned $20 billion purchase of design software maker Figma Inc. is at risk of being blocked by Britain’s competition watchdog unless the company offers remedies to resolve competition issues.
The Bank of Nova Scotia missed its fiscal fourth-quarter profit estimates as the company set aside more money than expected for potentially weakened loans.
Panama’s Supreme Court ruled against a law that would restrict a contract with First Quantum Minerals Ltd. approved, casting doubt on the future of one of the world’s largest copper operations.
Fast fashion retailer Shein has confidentially filed with U.S. regulators for an initial public offering that could take place next year, according to a person familiar with the matter.
Important events this week:
New Zealand interest rate decision, Wednesday
The OECD will publish its semi-annual economic outlook on Wednesday
Eurozone economic confidence, consumer confidence, Wednesday
Bank of England Governor Andrew Bailey speaks on Wednesday
US wholesale inventories, GDP, Wednesday
Cleveland Fed President Loretta Mester speaks Wednesday
The Fed releases its Beige Book on Wednesday
China Non-Manufacturing PMI, Manufacturing PMI, Thursday
OPEC+ meeting, Thursday
Eurozone CPI, unemployment, Thursday
US personal income, PCE deflator, initial jobless claims, pending home sales, Thursday
China Caixin Manufacturing PMI, Friday
Eurozone S&P Global Manufacturing PMI, Friday
U.S. Construction Spending, ISM Manufacturing, Friday
Fed Chairman Jerome Powell will take part in a fireside chat in Atlanta on Friday
Chicago Fed President Austan Goolsbee speaks Friday
Some of the key moves in the markets:
Shares
The S&P 500 rose 0.2% at 11:04 a.m. New York time
The Nasdaq 100 rose 0.1%
The Dow Jones Industrial Average rose 0.3%
The Stoxx Europe 600 fell 0.3%
The MSCI World Index rose 0.3%
Currencies
The Bloomberg Dollar Spot Index fell 0.3%
The euro rose 0.3% to $1.0983
The British pound rose 0.4% to $1.2682
The Japanese yen rose 0.6% to 147.86 per dollar
Cryptocurrencies
Bitcoin rose 1.5% to $37,598.31
Ether rose 1.1% to $2,038.62
Tie up
The 10-year Treasury yield fell three basis points to 4.36%
The yield on 10-year German government bonds fell five basis points to 2.50%
The 10-year UK government bond yield fell five basis points to 4.16%
raw materials
West Texas Intermediate crude oil prices rose 2.5% to $76.73 a barrel
Spot gold rose 0.9% to $2,031.86 an ounce
This story was produced with support from Bloomberg Automation.
– With support from Jason Scott, Tassia Sipahutar, Alex Nicholson, Carter Johnson, Masaki Kondo and Michael Msika.
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