Wall Street experienced stability after a significant rally, as traders predicted that the Federal Reserve would begin cutting interest rates next year. This expectation was balanced by the anticipation of policymakers taking measures to counteract the recent easing in financial conditions. The S&P 500, after recording its best week of 2023, saw a marginal increase and was on track for its sixth consecutive advance. The rally was attributed to oversold technical conditions and positioning, with gains primarily driven by the beaten-down megacap sector. Overall, traders are pricing in more than 100 basis points of rate cuts by the end of next year, and predictions for the first cut have been brought forward to June.
Amidst this scenario, a series of key speakers from the Federal Reserve, including Chair Jerome Powell, are scheduled to address the market. Market participants are expecting a cut in rates in June, though predictions of multiple cuts next year may face resistance from the Fed. The S&P 500’s best week in a year was seen as a bear-market rally by Morgan Stanley, who cited a gloomy earnings outlook, weaker macro data, and deteriorating analyst views. Jean Boivin from BlackRock Inc. believes that any year-end rally in stocks may be short-lived due to equities not fully reflecting the outlook for higher rates in the long term.
As Wall Street navigates these dynamics, some are cautious about the potential for higher rates impacting stocks. History has shown a negative correlation between tightened Fed monetary policy and stock performance. Concerns remain regarding whether the October breakdown was a bear trap and whether a swift move higher can be expected or if investors should lighten their exposure at current levels. The biggest issue on the minds of equity investors is whether 10-year Treasury yields have truly peaked. Overall, market participants are observing the interplay between rate cuts, financial conditions, and stock market performance closely.
In corporate news, Tesla plans to produce a new model for the European market, Tyson Foods is recalling chicken nugget products due to possible metal contamination, and Berkshire Hathaway’s cash pile hits a record high. Furthermore, traders anticipate a busy week for bond sales, with around 10 issuers looking to sell US investment-grade primary bonds on Monday. The market will also closely monitor key events, including central bank rate decisions and speeches from Fed officials, among other economic data releases, throughout the week.
