Nov 15

S&P 500 Rises 2% as Fed Rate Cut Boosts U.S. Yields

Stocks surged as bond yields fell, with an unexpected inflation slowdown reinforcing the view that the Federal Reserve's aggressive rate-hiking cycle is likely done, and the next move will be a cut next year.

The S&P 500 index rose nearly 2%, the most since April, with Tesla Inc. leading among mega-cap stocks and Nvidia Corp. rising for the 10th consecutive session. Regional banks jumped almost 6%, and the Russell 2000 small-cap index added over 5%.

Goldman Sachs Group Inc.'s stock basket, which includes the shortest positions, is outperforming the broader market, a sign that some traders are preparing to cover bearish bets. The yield on two-year bonds fell more than 20 basis points, and the U.S. dollar dropped 1.2%.

While the Wall Street rally could lead to further easing of financial conditions – and ultimately complicate the Fed's job – bets on a "pivot" next year have risen. Fed swaps indicate that the likelihood of a new rate hike has dropped nearly to zero, as market pricing by July had fallen by 50 basis points.

"Recent investors who are not convinced that the Fed is done are likely to throw in the towel," said Bryce Doti of Sit. "The next move by the Fed is likely to be a rate cut next summer rather than another rate hike."

According to Chris Larkin of E*Trade at Morgan Stanley, although the figures are cooler than expected, they are likely to prompt some investors to begin planning rate cuts in 2024. The Fed is likely to continue to push back against this view.
Chris Zaccarelli from Independent Advisor Alliance believes it remains to be seen whether the economy can avoid a recession, but the market should continue to rise as investors start to accept the view that higher rates are off the table.

As Richard Flynn of Charles Schwab UK stated, the decline in inflation suggests that recent monetary policy makes the prospect of a "soft landing" even more likely. This news increases the likelihood that officials will refrain from further rate hikes.

"As the U.S. economy holds steady, inflation data represents a 'soft landing nirvana' for equity markets," said Neil Dutta, head of the economics department at Renaissance Macro Research.

According to Lauren Goodwin of New York Life Investments, an untouched deflationary process means the Fed can sit tight for now, reducing the risk of overly restrictive policy. However, she warns investors who show too much enthusiasm that financial conditions are now easing again, causing the Fed to be on guard and highly dependent on data.

"The Fed's job is that the market is trying to move to the 'endgame,' risking a more extensive or faster easing of financial conditions than the Fed would like," said Krishna Guha of Evercore ISI. "So expect Fed officials to maintain a very cautious and relatively hawkish tone."

Cathie Wood, head of ARK Investment Management, noted that deflation is already underway in the U.S. across all sectors and will force the central bank to start a big interest rate cut cycle.

Fed officials welcomed the latest data showing a decline in inflation in the U.S., adding that there is still a way to go before it reaches the central bank's 2% target.

"Our base case remains that the Fed will not raise rates further," said Brian Rouzan of UBS Global Wealth Management. "However, inflation is still too high and the labor market is still too tight for the Fed to declare victory and announce the end of the rate hike cycle."

According to Rouzan, such an announcement is likely to be made no earlier than three months from now, unless the data suddenly shifts towards weaker indicators, and then markets could quickly focus on the timing of the first-rate cut, leading to a decline in bond yields and a weaker U.S. dollar.
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