What happened last week
- Last week was a full macro week with a string of positive surprises that drove a bid to risk assets.
- Consumer and producer inflation data indicated further progress towards the Fed’s 2% target.
- Powell sent markets soaring as he refused to push back on dovish market expectations; the market is now discounting roughly six total rate cuts next year.
What we’re watching this week
- The holiday slowdown is likely to begin in earnest this week with last week’s big macro drivers out of the way.
- In the US, another measure of inflation preferred by the Fed, PCE, in addition to more information on the consumer, will be the primary events.
- Outside the US, we are watching the Bank of Japan (BOJ); expectations for a hawkish pivot by the Japanese central bank are not likely to be met this week.
Horizon’s Investment Management Views
Last week was billed as a big one for investors – inflation data, a Fed meeting, and a host of other central bank meetings across the globe – and it fully lived up to those lofty expectations. Stocks added to their recent gains (now seven straight up weeks for the S&P 500, its longest streak in six years), and bond yields plunged. While the CPI report for November had a little something for everyone, the Fed meeting was unequivocally dovish. The pivot investors have been hoping for is finally here – policy is set to ease next year, perhaps meaningfully – and as soon as the first quarter of 2024. Interest rate-sensitive sectors like small caps, real estate, and regional banks were the biggest beneficiaries last week, while international stocks benefitted surprisingly little from the weakness in the dollar.
Bond markets are now pricing six cuts for the Fed, while their updated expectations released last week pointed to just three. We don’t think this yawning gap is a problem for risk assets right now – official Fed messaging tends to lag the market around turning points. However, inflation could rear its head in a few months if lower rates cause a reacceleration in the economy, particularly for interest rate-sensitive sectors (e.g., housing). Interestingly, the European Central Bank (ECB) or the Bank of England did not share last week’s dovish messaging despite their less favorable growth trajectories, a headwind for the dollar that has our attention.
This week is likely to be considerably slower than the prior few. The Fed’s preferred inflation gauge, PCE, and a Bank of Japan (BOJ) policy meeting are the highlights from a macro perspective. We expect no BOJ policy change; a potential outcome is for hawkish BOJ expectations to be disappointed, weighing on the yen, which could be a tailwind for Japanese equities. Consumer confidence, income, and spending data in the US will round out the data calendar. Lastly, we are paying attention to Fed messaging – if they want to cut by March, then the doves will need to start making the case publicly.
CPI = Consumer Price Index, PPI = Producer Price Index, PMI = Purchasing Managers’ Index, PCE = Personal Consumption Expenditures Price Index.
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