Markets Set New Highs Amid Economic Reshaping and Fed Rate Speculation

The markets surged to yet another set of record highs on Tuesday, marking the third consecutive day of this triumphant streak. Where next?

• An economic slowdown is evident, but recession fears are subdued, and the market continues a broad recovery across sectors.
• The Fed is expected to maintain rates, while the market awaits potential future rate cuts amid economic recalibrations.
• Markets see varied activity despite layoffs and global economic adjustments.

The markets surged to yet another set of 2023 highs on Tuesday, marking the third consecutive day of this triumphant streak.

With the S&P 500 climbing 0.5% and the Nasdaq Composite ascending 0.7%, the rally followed the consumer price index (CPI) report meeting expectations. However, the morning's producer price index (PPI) fell slightly short of projections, reinforcing the ongoing narrative of declining inflation.

Insights into the Fed's perspective suggest a hierarchy in data importance, ranking the personal consumption index (PCE), PPI and then CPI. The latest PPI figures trailed predictions significantly, reporting 0.9% year-over-year versus the estimated 1%. Month-over-month PPI showed no change against the expected 0.1%. Core figures also underperformed, registering at 0% month-over-month and 2% year-over-year compared to forecasts of 0.2% and 2.2%, respectively.

A slowdown, not a recession

Amidst this data, a prevailing takeaway remains: The economy is experiencing a slowdown, yet it isn't teetering on the brink of recession. While recent job reports marginally exceeded expectations, excluding returning auto workers revealed figures below forecasts. Concurrently, producer prices are also exhibiting signs of deceleration. The one outlier surpassing the Fed's 2% target growth rate remains the CPI, yet projections suggest this figure might decline if the PPI trend persists.

The spotlight now shifts to the afternoon's Federal Open Market Committee (FOMC) meeting. Predictably, the Fed is expected to maintain current interest rates, but market anticipation revolves around potential future rate cuts. CME projections indicated a 41% chance of a rate cut by March before the PPI release, with a 73% likelihood of one or two cuts by May—figures that remained largely unaffected post-PPI announcement.

The S&P 500's remarkable rebound of 13% since late October, excluding the energy sector, highlights a broad-based market recovery. Tuesday's record-setting moment of 51 S&P stocks hitting new highs, a figure unmatched since April, underscores this trend. Despite concerns over the dominance of select tech giants, the rally's expansion across various sectors bodes positively.

Several stocks made headlines: Pfizer (PFE) faced a 7% premarket dip following lowered yearly guidance, while Tesla (TSLA) reported a slight 1% decline due to a substantial recall of over two million vehicles concerning autopilot safety. Conversely, Take-Two Interactive Software (TTWO) soared by nearly 3% as it joined the Nasdaq 100 on Dec. 18 during the index rebalance. Southwest Airlines (LUV) maintained stability after raising its fourth-quarter outlook, citing robust holiday travel.

Shock therapy for Argentina

Beyond stock news, Argentina announced a 54% currency devaluation and spending cuts, responding to economic turmoil under President Javier Milei's "economic shock therapy." Furthermore, layoffs in major consulting and financial service firms—Ernst & Young, KPMG, Deloitte, and McKinsey—underscore a trend in the services sector's workforce reduction.

Despite it being a quadruple witching expiration week, combining multiple options and futures expirations, market volume remained subdued, perhaps influenced by the FOMC meeting. Decreasing market volatility, illustrated by the VIX closing just over 12, and crude oil prices dipping below $70 for the first time since June suggest potential declining demand.

Amidst these market shifts, adhering to established investment strategies and long-term objectives remains prudent in navigating ongoing economic uncertainties.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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