Christmas comes early for US bond and equity markets

The Fed’s offer of greater than expected rate cuts next year (if inflation behaves) spurred over one percent rallies in the S&P500, NASDAQ and Russell 2000, after being down 0.5% before the news. Bonds rallied strongly, being up over 4% along the curve. Gold jumped close to 2% and hit a new all-time high. The dollar sold off versus all major cross rates.

TODAY’S MAJOR NEWS

Fed holds rates now, promises cuts next year

The Federal Reserve signaled greater policy easing next year, with the possibility of cutting rates by 75 basis points (bp) rather than 50 bp previously indicated, to reward an anticipated further decline in inflation to 2.4% next year (down from 2.5% forecast in September) and 2.2% in 2025. Officials acknowledged a rapid deceleration in the US economy since 5% growth in the third quarter, looking for just 1.4% next year.

Today’s statement left the door open for rate hikes, if needed: “In determining the extent to which any additional policy firming may be appropriate … the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Producer Price Index (PPI) better than expected

• Headline PPI was up just 0.9% year-on-year in November, as expected, but down from a 1.3% rise last month
• Core PPI rose 2.0% year-on-year in November, versus an expected 2.2% rise, and down from 2.4% in October
• The producer price index was flat month-on-month in November, versus an expected 0.1% rise, following a 0.5% decline in October
• The core PPI, excluding volatile food and energy sectors, was also flat month-on-month in November, versus an expected 0.2% rise, and matching what we saw in October

Chinese officials fail to inspire economic confidence

Risk-off sentiment weighed on Chinese stocks today, reflecting investor disappointment in statements emerging from China’s two-day closed door economic conference, with the Shanghai Composite Index off over 1%, and trading just above levels last seen in early 2019. Analysts note that government officials are full of promises, but weak on substantive support for the economy. S&P Global warned that China’s economic slowdown continues to bring pressure on heavily indebted local governments in China, adding further credit risk stress to China’s banks, local government financing platforms and real estate enterprise, and it went on to warn that current measures being implemented by the central government may not be enough to alleviate these pressures.

TODAY’S MAJOR MARKETS

Major US indices turn around strongly on Fed news

• The S&P 500, NASDAQ and Russell 2000 all did a one-eighty after the Fed news, up over 1% in afternoon trading have been down 0.5% in the morning
• The Nikkei 225 fell again, off 1.7% overnight, continuing recent weakness, while up 0.2%, with the Dax and FTSE 100 were virtually unchanged
• The VIX, Wall Street’s fear index, was unchanged at 12.2

Bonds rally strongly, Dollar falls

• US bonds rallied over four percentage points in price terms, bringing 2- and 10-year yields down to 4.52% and 4.07% and perhaps signaling the end of a protracted bond bar market
• 10-year TIPS index-linked yields saw an unprecedented 15 basis point fall in yield, to 1.89%
• The dollar index fell 1.0% to 102.8
• Versus the dollar, Yen rose 1.5%, the Euro rose 0.8%, with Sterling rose 0.5%

Gold hit new all-time high

• Oil prices rallied 1.2% to $69.4 per barrel
• Gold prices hit a new all-time high $2,31 per ounce, up 1.9%, while Silver prices rose 2.7% to $23.8 per ounce
• The grain and oilseed sector is mostly weaker

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com