Stock Market: Will the Fed Spoil the Santa Rally This Year?
Stock Market: Will the Fed Spoil the Santa Rally This Year?
By:Ilya Spivak
Stocks hit a wall after blistering Thanksgiving rally. Will Fed rate cut worries cancel the Santa rally?
- Stock markets stalled on the first day of December after a brisk rally last week
- Fed policy speculation still appears to be the top driving narrative for traders
- ISM service-sector gauge, consumer confidence and payrolls data eyed ahead
Stock markets struggled to sustain momentum after last week’s blistering rally as the calendar turned to December. The bellwether S&P 500 index finished the day down 0.48%. The tech-tilted Nasdaq 100 fared a bit better with a loss of 0.36%, but the small-cap Russell 2000 shed a hefty 1.27%.
Wall Street roared higher on holiday week shortened by Thanksgiving. Stocks rallied as Treasury bond yields and the US dollar fell. Gold and bitcoin prices posted healthy gains. These moves seem to invert the top story animating markets since late October, marked by worries about whether the Federal Reserve will allow another rate cut in December.
Stocks still seem anchored to what the Federal Reserve does next
A deep sense of uncertainty has bedeviled the markets since Fed Chair Jerome Powell shocked traders with a forceful push against the inevitability of lowering rates at the year’s last policy meeting, following cuts in September and October. That tellingly marked the top for US equity markets, despite a flurry of would-be supportive headlines.
Indeed, until last week, traders were unmoved by generally strong third-quarter earnings releases – including for most of the high-flying “magnificent seven” tech names – as well as the end of the longest-recorded US government shutdown. They also brushed aside welcome de-escalation of the latest flare up in the US-China trade war.
Against this backdrop, last week’s exuberance looks more like a tactical rebalancing of traders’ books ahead of a holiday market closure rather than a meaningful breakthrough on the sentiment front. Indeed, the rally is hard to pin down to this or that change in the underlying variables.
Will rate cut uncertainty send traders scrambling again?
In fact, even Fed rate cut expectations have held broadly steady. The markets were already putting the probability of a 25-basis-point (bps) cut in December at over 80% by the start of last week’s trade, and it has been little-changed since. With this in mind, it seems doubly ominous that stocks stalled on the very first day after the holiday lull.
From here, purchasing managers index (PMI) data from the Institute of Supply Management (ISM) and consumer confidence figures from the University of Michigan (UofM) will offer a glimpse of US economic conditions. An estimate of private payrolls growth from Automatic Data Processing (ADP) is also on tap.
The ISM manufacturing survey has already produced soggy results. It showed that economic activity in the sector shrank at the fastest pace in four months as new orders and employment dropped while price growth accelerated. The companion service-sector report is now in focus. Forecasts see mildly cooling growth after October’s eight-month high.
Meanwhile, consumer confidence is expected to narrowly inch up in December after sliding to the lowest in over three years in November. Sentiment has soured for four months straight, despite cooling inflation expectations. The ADP report is penciled in to show meager rise of just 10,000 jobs.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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