The holiday-shortened week last week saw decreased volume in most markets, but that did not cause price action to stop. The correlation between stocks and bonds remained positive with equities rallying and bond yields dropping (prices rising). The stock market rally may be somewhat technical but is likely also driven by the market trying to sniff out whether the Federal Reserve (Fed) will pivot in the future. Although the November Fed meeting minutes last week gave more clarity on the Fed slowing the pace of rate hikes, we don’t think that means they are close to stopping their rate increases near term.
The bond market’s read on the Fed and how their monetary policy will affect the economy continues to remain downbeat. Both the 2/10-year and the 3-month/10-year U.S. Treasury curves are deeply inverted now, both lower than -50 basis points (-0.50%). The volatility seen in the bond market also remains elevated with wider swings in both directions. This is likely because of the Fed’s quantitative tightening program which is reducing the amount of bonds they have on their balance sheet.
Several key economic indicators will be released this week before the Fed’s December 14 meeting. Their preferred inflation measure, Personal Consumption Expenditures (PCE), will show if core inflation really has peaked. The November jobs report will also signal the potential ramifications of the policy tightening that the Fed has done so far.
A look back
- Global stocks were mixed with U.S. and international developed market equities up about 2% last week, while emerging markets were down by a small margin.
- U.S. Treasury yields dropped last week, further inverting both the 2-/10-year and the 3-month/10-year curves beyond 50 basis points.
- Fed meeting minutes from November gave more clues that they might slow their pace of hiking at the December 14 meeting.
A look ahead
- The PCE report will be released this week, with expectations that monthly figures may slow, but stay higher than the Fed wants.
- 11 Fed officials will give speeches this week as they try to frame their outlook.
- Economic releases: Conference Board Consumer Confidence, FHFA Home Price Index, Pending Home Sales, PCE, ISM Manufacturing, Nonfarm Payrolls, and the Unemployment Rate.
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