There Wasn't Much Action In The First Half Of The Week Coming Off The Holiday-Fueled Gains Last Week. Participants Played A Waiting Game In Front Of Fed Chair Powell's Speech On Wednesday And A Slate Of Key Economic Data Later In The Week.
The market liked what it heard in Mr. Powell's speech and things took off in a big way on Wednesday. Fed Chair Powell reportedly did not tighten the screws of his monetary policy position any further.
Some will contend that he actually loosened the screws a bit. We would argue that he showed up with his toolbox at the Brookings Institution but never took a tool out of the box. The market, waiting with bated breath for the Fed Chair to lower the hammer, let out a huge sigh of relief when he did not.
The market's worst fear then was not realized and that became a rally catalyst that ultimately triggered a huge short-covering rally and some chasing action as the S&P 500 broke above key resistance at its 200-day moving average.
It was an overreaction in our estimation because the Fed Chair repeated just about everything he said following the November FOMC meeting, but in splitting linguistic hairs, some added attention was paid to his summation that "the ultimate level of interest rates will be somewhat higher than previously expected" versus the original contention that "the ultimate level of interest rates will be higher than previously expected."
Mr. Powell's remarks (and tone) presumably lessened the fear of another 75-basis point rate hike. Granted the fed funds rate is still going higher from current levels, but market participants can smell a peak in the policy rate around 5.00% in the first half of next year. If the FOMC elects to raise the target range by 50 basis points at the December meeting, the target range will be 4.25-4.50%.
On Thursday, market participants received the October Personal Income and Spending Report, which favored the "smaller" rate hike at the same time it favored a soft landing possibility.
Briefly, personal income increased 0.7% month-over-month in October (Briefing.com consensus 0.4%) and personal spending jumped 0.8% (Briefing.com consensus 0.8%). The PCE Price Index was up 0.3% month-over-month (Briefing.com consensus 0.4%) and the core-PCE Price Index, which excludes food and energy, increased 0.2% (Briefing.com consensus 0.2%).
On a year-over-year basis, the PCE Price Index was up 6.0%, versus 6.3% in September, and the core-PCE Price Index was up 5.0%, versus 5.2% in September.
The key takeaway from the report was the improvement in the inflation readings, particularly the core-PCE Price Index given Fed Chair Powell's emphasis that the Fed's policy tools are better designed for working on core inflation.
The big rally effort ran into some resistance as market participants contended with the notion that the upside moves might have been an overreaction and that the growth environment is going to be challenging given the past rate hikes and the rate hikes that are yet to come.
A 49.0% reading for the November ISM Manufacturing Index, which is the first sub-50% reading (the dividing line between expansion and contraction) since May 2020, reined in some of the rebound enthusiasm.
The strength of the mid-week rally was tested again when market participants received the November employment report on Friday. Nonfarm payroll growth was higher than expected, the unemployment rate held near a 50-year low of 3.7%, and average hourly earnings increased at a robust 0.6% month-over-month, leaving them up 5.1% year-over-year.
The report itself was good news from an economic standpoint, yet the market saw it as bad news, thinking it will push out any eventual pivot by the Fed with its monetary policy. In brief, the report signals higher for longer with respect to the target range for the fed funds rate.
The initial retreat following the employment report saw the S&P 500 breach its 200-day moving average, but by Friday's close the index reclaimed a position above that level. All in all, this week was a win for the bulls given that the market showed nice resilience to selling efforts and the S&P 500 held the line at that key technical level.
Nine of the 11 S&P 500 sectors closed with a gain on the week. Communication services (+3.3%) and consumer discretionary (+2.1%) enjoyed the biggest gains. Meanwhile, financials (-0.6%) and energy (-2.0%) were the lone sectors in the red by the end of the week.
In the Treasury market, there were big down swings predicated on the thinking that maybe the Fed won't have to raise rates as high as feared. The continued inversion along the yield curve reflects the festering concerns about the Fed raising rates into a weakening economy and inviting a recession. The 2-yr note yield fell 19 basis points to 4.29% and the 10-yr note yield fell 18 basis points to 3.51%.
Dow Jones Industrial Average: +0.2% for the week / -5.3% YTD
S&P Midcap 400: +0.6% for the week / -9.4% YTD
Russell 2000: +1.3% for the week / -15.7% YTD
S&P 500: +1.1% for the week / -14.6% YTD
Nasdaq Composite: +2.1% for the week / -26.7% YTD