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There was a fair amount of data this week, but only one thing mattered: the Fed. Continued slowing inflation data and signs of a slowing economy took the Fed from a hawkish, we will keep rates higher-for-longer stance, to a much more dovish stance in the past meeting. The Fed's projections have switched from higher rates indefinitely to an expected three rate cuts next year, which is a very big shift. More, Chair Powell's commentary in the press conference acknowledged directly both the better inflation data and slower growth. Higher for longer may be dead—at least that’s what markets think.
Risk-On Takes Center Stage
The yield on the U.S. Treasury 10-year dropped below 4 percent for the first time since August, driving financial markets up across the board. The major indices were up between 2 percent (for fixed income, Bloomberg U.S. Aggregate Bond Index) and 4 percent (for tech and emerging markets, Nasdaq and the MSCI Emerging Markets Index). The betting is that with the Fed backing off and lower rates, we could see faster earnings growth and higher valuations. Risk-on is back at center stage.
Markets Pricing in Cuts
Mind you, markets may be getting ahead of themselves. If you look at the yield curve, they are now pricing in about six cuts next year—as opposed to the Fed's indication of three cuts. And even those three are not certain, depending as they do on slowing growth and inflation staying down.
One final piece of data for the week, the retail sales report, showed that consumers are still shopping. That may mean growth and inflation won't slow as much as markets now think.
All Good for Now
But for the moment, it's all good. Markets are cheering, rates are down, and consumers are shopping into the holiday season. And that is everything we can ask for as we head into the weekend.
Have a great one!
