(Bloomberg) — Treasury bonds extended their November rally on bets that the Federal Reserve is finished raising interest rates and can ease monetary policy next year.
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As US yields fell, Fed swaps expected rate cuts of over 100 basis points by the end of 2024. In a speech titled “Something Seems There Is Something,” Gov. Christopher Waller — one of the most hawkish Fed officials — said he was “increasingly confident.” This policy is currently well positioned to slow the economy and bring inflation back to 2%.” His colleague Michelle Bowman acknowledged the many uncertainties, but refrained from announcing an impending increase.
For Peter Williams of 22V Research, the likelihood of a dovish policy shift or rebalancing appears to be increasing even as the likelihood of a Fed-induced recession decreases.
“The next policy decision from the FOMC will likely be a rate cut, and markets are trying to price in these cuts even before Powell and Co. and indeed other global central bank chiefs have declared victory over inflation,” said Fawad Razaqzada, market analyst at City Index and Forex.com. “Markets are getting a little excited, but traders are just looking to take advantage of the momentum – and will ask questions later.”
Two-year yields fell 15 basis points to 4.74%. The dollar posted losses for the fourth consecutive session and headed for its lowest level since August. The S&P 500 hovered near “overbought” levels in a rally that put the market on track for one of its biggest November gains ever.
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On the economic front, 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.
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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.
“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 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.
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
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.”
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 U.S. dollar has weakened across the board as the market becomes increasingly convinced that the Federal Reserve’s next move will be to cut interest rates, possibly as early as the second quarter,” Razaqzada noted.
Company highlights:
The long-awaited delivery of Tesla Inc.’s Cybertruck on Thursday is a “big moment” for the company, Wedbush analyst Dan Ives said.
Morgan Stanley was downgraded to “Hold” by Société Générale.
Micron Technology Inc., the largest U.S. maker of semiconductors used in computer memories, warned that the company is spending more than expected on operations.
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.
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.
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.
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.
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.
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 was little changed at 2:51 p.m. New York time
The Nasdaq 100 has barely changed
The Dow Jones Industrial Average rose 0.3%
The MSCI World Index rose 0.2%
Currencies
The Bloomberg Dollar Spot Index fell 0.4%
The euro rose 0.4% to $1.0993
The British pound rose 0.6% to $1.2701
The Japanese yen rose 0.9% to 147.40 per dollar
Cryptocurrencies
Bitcoin rose 3.3% to $38,237.75
Ether rose 2.4% to $2,063.74
Tie up
The 10-year Treasury yield fell five basis points to 4.34%
The yield on 10-year German government bonds fell five basis points to 2.50%
The 10-year UK government bond yield fell four basis points to 4.17%
raw materials
West Texas Intermediate crude oil prices rose 2.2% to $76.51 a barrel
Spot gold rose 1.4% to $2,042.28 an ounce
This story was produced with support from Bloomberg Automation.
– With support from Jason Scott, Tassia Sipahutar, Alex Nicholson, Carter Johnson, Masaki Kondo, Michael Msika, Michael Mackenzie and Edward Bolingbroke.
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