The velocity of change is incredible. At the end of October, the S & P 500 was at its lowest level since May and 10% below its July peak. The NASDAQ 100 was almost 12% below its July peak and today is at the highest level in over 22 months, a stunning 27% reversal.
The reason for this incredible advance is interest rates. Around October 20 the benchmark 10-year Treasury was yielding about 4.99%, its highest yield since 2005, increasing over 80 bps in yield since January 1, 2023.
At that time, sentiment indicators had almost fully priced another interest rate increase by year’s end and many market luminaires were suggesting the 10-year may have a “mid six handle” sometime in 2024.
In about 40 days the 10-year has rallied about 60 bps, the strongest advance since the depth of the Great Financial Crisis in December 2008 according to Bloomberg. Sentiment indicators have fully priced in an interest rate cut in May with year end 2024 fed funds rate around 4.25%-4.375%.
Are these gains sustainable? The extreme narrowness of the advance is widely known. The discrepancy between the 5-7 mega-sized tech companies and the rest of the market has been discussed ad infinitum.
Third quarter GDP was revised higher from the initial rate of 4.9% to 5.2%. The pricing components were mixed but still indicated inflation is still considerably higher than the mandated FOMC speed limit.
The Beige Book or the statistical compilation utilized at the upcoming Fed meeting indicated that economic activity has slowed in recent weeks “as consumers pulled back on discretionary spending and durable goods, like furniture and appliances as consumers showed more price sensitivity.”
Labor demand continued to ease “as most districts reported flat to modest increases in employment.” Pring power varied with service providers finding it easier to pass through increases than manufacturers and “most districts expect moderate price increases to continue into next year.”
Markets had little reaction to the information.
Last night the foreign markets were up. London was up 0.58%, Paris up 0.37% and Frankfurt up 0.46%. China was up 0.26%, Japan up 0.50% and Hang Seng up 0.29%.
Dow and NASDAQ futures are up 0.50% and 0.25%, respectively, on the belief the Fed will pivot by early spring. The 10-year is off 11/32 to yield 4.30%.
