Bear market rally?  

Can it really be described as such? The S&P 500 was full of big rallies during the 2000-03 bear market. They did not change the overall trend. The market doesn’t bottom until after the Fed starts cutting…or is it different this time? 

Market Overview 

Equities traded up on Monday with Europe and the US higher, though London fell a touch as basic resources were hit by lower metal prices and Chinese deflation. European equity markets made modest gains in early trade on Tuesday with the FTSE 100 catching up with a pop of 0.5%, whilst the DAX +0.1% and CAC +0.15% making steady progress. Oil steadied after rising for three days, gold stabilised at $1,985 and the dollar (DXY futs) eased back to test Friday’s low at 103.40.  

The S&P 500 touched an intra-day high of the year at 4,623 and finished up 0.4%. The Nasdaq and Dow Jones also firmed up with NDX now within a whisker of its all-time high. Crypto stocks were hit as bitcoin took a big tumble after its recent ramp up but remains near $42k this morning after rallying off the low.  

Modest Gains for Equity Markets 

Some gains have come ahead of a key week for global central banks – expect them to stay on pause and push back somewhat against the market’s aggressive rate cut pricing. Today is the super-important US CPI and a 30yr Treasury auction, which follows a poor auction of this paper a month ago. Inflation is key – anything too hot will push out rate cut expectations a little further. Yields are a little lower this morning with the US 10yr sub 4.20% having after not-great auction yesterday, whilst the Vix has been crushed by expectations for extreme dovishness.  

Inflated Expectations 

Wall Street expects the core CPI index rose 0.3% from October, holding the 12-month rate at 4.0%., whilst the headline rate is seen +0.1% month on month, lowering the 12-month rate to 3.1% from 3.2%. NY Fed median one-year ahead inflation expectations declined to 3.4 percent, the lowest reading of the series since April 2021, but the 3-year and 5-year numbers were unchanged at 3.0 percent and 2.7 percent respectively.  

Max complacency?  

Building on this theme, also explored in my 2024 Watchlist report - War is also inflationary. Israel’s central bank yesterday warned a rise in government spending, sparked by the war, could raise inflation. “The economy’s risk premium remains high,” minutes from its last meeting stated. “In addition, there is uncertainty regarding the scope of government expenditures … and their impact on inflation.” 

Bank of Japan and the UK 

Could we be in for a Christmas surprise? Bloomberg reported that sources say the BoJ sees little need to end negative rates in December, lacks proof of sustainable inflation and will reach a decision on when to pull the trigger on ending negative rates based on data up to the last minute.   

Meanwhile in the UK, wage growth cooled – markets brought forward rate cut expectations after and we are seeing sterling come under some selling pressure as a result. Wage growth came down to 7.3% - down but still pretty darn high...OIS markets imply rate cut by Jun 2024 vs Aug 2024 yesterday. GBPUSD had been rising to 1.2580 before the release and since dropped to 1.2550, with yesterday’s lows in at 1.25340 offering near-term support, the highs at 1.2590 looking like immediate resistance.