Stocks Churn With Fedspeak, Economic Data in Focus: Markets Wrap

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Rita Nazareth

28 Nov 2023, 09:23 PM IST

Stocks Edge Higher With Key US Jobs Data on Radar: Markets Wrap

(Bloomberg) -- Stocks saw small moves, with traders wading through remarks from a slew of Federal Reserve speakers and the latest economic readings for clues on the central bank’s next steps.

The S&P 500 was little changed after the benchmark hit “overbought” levels in a rally that put the market on pace for one of its biggest November gains on record. Morgan Stanley dropped on an analyst downgrade. Micron Technology Inc. led losses in chipmakers after making a modest increase to its revenue outlook and projecting more operating expenses. Treasury 10-year yields hovered near 4.4%, while the dollar retreated.

“It’s a busy day for Fedspeak,” said Will Compernolle, macro strategist at FHN Financial. “The real focus will be on how much Fed officials push back on markets’ growing confidence that the Fed has reached its terminal rate and that rate cuts are in the pipeline as early as the first half of next year.”

Just a few days ahead of the “blackout period” in which central bank officials don’t talk publicly, traders will focused on Fedspeak. Governor Christopher Waller said the recent slowing of economic activity may indicate policy is tight enough to contain inflation that still remains too high. Fed Bank of Chicago President Austan Goolsbee noted inflation is coming down, but it’s not yet back to target.

The list of speakers also includes: Kathleen O’Neill Paese, Michelle Bowman and Michael Barr.

US consumer confidence rose for the first time in four months, aided by more optimistic views about the outlook for the labor market. Home prices hit a fresh record high, according to seasonally adjusted data from S&P CoreLogic Case-Shiller.

Stocks Churn With Fedspeak, Economic Data in Focus: Markets Wrap

The good news for investors is that recession isn’t here yet, this makes an end-of-year rally likely, according to Lauren Goodwin at New York Life Investments. In past economic cycles, markets don’t tend to price in recession until jobless claims are rising and earnings are in outright decline — signs that recession has already arrived, she noted.

“Modest slowdowns in inflation and employment growth mean that a ‘Fed relief rally,’ accompanied by rallies in stocks, bonds and credit as we are seeing now, can be sustained,” Goodwin said. “Our concern is that this late cycle limbo is no different than those of the past: a moment of Goldilocks before the very reason that inflation is moderating – slowing economic growth and employment – becomes clear in the data.”

Bank of America Corp. clients were net buyers of US equities last week, with institutional and retail investors leading purchases while hedge funds offloaded shares. Clients funneled $2.6 billion into US stocks, with inflows to both individual names and exchange-traded funds, quantitative strategists led by Jill Carey Hall said.

This month’s rally in the S&P 500 is now running out of steam, according to Citigroup Inc. strategist Chris Montagu. He said futures flows last week were “mixed,” leaving net positioning in the benchmark index looking “slightly bearish.”

The recent sharp pullback in volatility as year-end approaches creates hedging opportunities given the cloudy outlook for equities, according to Goldman Sachs Group Inc. strategist Christian Mueller-Glissmann.

“After the recent equity rally, we believe there is an attractive entry point to hedge the risk of a retracement,” he noted. “Cross-asset volatility has continued to reset lower, supported by markets further embracing the ‘inverse’ Goldilocks backdrop in the US with faster-than-expected inflation normalization and growth remaining resilient.”

That drop has further widened the gap to rates volatility, which should normalize in 2024, he added.

A Bloomberg Intelligence model known as the Market Regime Index — which clusters periods into three phases dubbed accelerated growth (green), moderate growth (yellow) and decline (red) — has remained stuck in the middle for the past nine months. That suggests that equity-return expectations should remain average until the Fed shifts away from raising interest rates to cutting them, according to BI’s chief equity strategist Gina Martin Adams and senior associate analyst Gillian Wolff.

Meantime, hedge funds piled into bullish dollar bets this month despite the currency’s slide on softening US economic data and increasing expectations that the Fed’s most aggressive rate-hiking cycle in a generation is near an end.

A metric of leveraged funds’ net longs on the greenback against eight currencies rose to its highest level since February 2022 as of Nov. 21, according to data from the Commodity Futures Trading Commission aggregated by Bloomberg. It stood at net long 103,042 contracts, just above a previous year-to-date high seen in April, after bottoming around a net short position of around 72,000 contracts in March.

“The US dollar has been weakening across the board as the market becomes increasingly convinced that the next move from the US central bank will be to cut interest rates, possibly as early as the second quarter,” said Fawad Razaqzada, market analyst at City Index and Forex.com.

Corporate Highlights:

PG&E Corp. said it will pay out a dividend for the first time in about six years as part of efforts by the California utility giant to restore its financial health after emerging from bankruptcy.
Boeing Co. was upgraded at RBC Capital Markets to outperform as the shares are in the early stages of “a significant shift in sentiment” amid strong demand.
Zscaler Inc., a security software company, affirmed a forecast for 2024 calculated billings that fell slightly short of estimates at the midpoint.
Bristol Myers Squibb Co. agreed to pay as much as $2.3 billion to collaborate with Avidity Biosciences Inc. on developing drugs to treat rare heart conditions.
Reddit Inc. is again holding talks with potential investors for an initial public offering for the social media company, according to people familiar with the matter.
Adobe Inc.’s planned $20 billion purchase of design software maker Figma Inc. risks being blocked by Britain’s competition watchdog unless it offers up remedies to solve competition issues.
Bank of Nova Scotia missed fiscal fourth-quarter profit estimates as the company set aside more money than expected for potentially souring loans.
Panama’s top court ruled against a law approving a contract with First Quantum Minerals Ltd., throwing into doubt the future of one of the world’s biggest copper operations.
Fast-fashion retailer Shein has filed confidentially with US regulators for an initial public offering that could take place next year, according to a person familiar with the matter.

Key events this week:

New Zealand rate decision, Wednesday
OECD releases biannual economic outlook, Wednesday
Eurozone economic confidence, consumer confidence, Wednesday
Bank of England Governor Andrew Bailey speaks, Wednesday
US wholesale inventories, GDP, Wednesday
Cleveland Fed President Loretta Mester speaks, Wednesday
Fed releases its Beige Book, Wednesday
China non-manufacturing PMI, manufacturing PMI, Thursday
OPEC+ meeting, Thursday
Eurozone CPI, unemployment, Thursday
US personal income, PCE deflator, initial jobless claims, pending home sales, Thursday
China Caixin Manufacturing PMI, Friday
Eurozone S&P Global Manufacturing PMI, Friday
US construction spending, ISM Manufacturing, Friday
Fed Chair Jerome Powell to participate in “fireside chat” in Atlanta, Friday
Chicago Fed President Austan Goolsbee speaks, Friday