Market Snapshot
briefing.com
| Dow | 37306.02 | +0.86 | (0.00%) | | Nasdaq | 14904.81 | +90.89 | (0.61%) | | SP 500 | 4740.56 | +21.37 | (0.45%) | | 10-yr Note | -4/32 | 3.96 |
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| | NYSE | Adv 1373 | Dec 1419 | Vol 1.0 bln | | Nasdaq | Adv 1985 | Dec 2335 | Vol 5.9 bln |
Industry Watch
| Strong: Energy, Communication Services, Consumer Discretionary, Consumer Staples, Materials, Financials, Health Care |
| | Weak: Real Estate, Utilities |
Moving the Market
-- Modest buying activity after seven straight winning weeks for the stock market
-- A buzz of M&A activity supporting the positive bias
-- Some fear of missing out on further gains in this seasonally strong period for the market
-- Added support from relative strength in mega cap stocks
-- Surge in oil prices due to geopolitical angst related to the understanding that several shipping companies have suspended travel through the Red Sea, including BP, because of attacks on vessels by Houthi militants
-- Selling in Treasuries related to the move in oil
| Closing Summary
18-Dec-23 16:30 ET
Dow +0.86 at 37306.02, Nasdaq +90.89 at 14904.81, S&P +21.37 at 4740.56
[BRIEFING.COM] Following a seven-week win streak, the S&P 500 (+0.5%) and Nasdaq Composite (+0.6%) closed with gains thanks to strength in their mega cap components while the Dow Jones Industrial Average closed flat and the Russell 2000 declined 0.1%.
There was not a lot of conviction on either side of the tape today. Decliners had a fractional lead over advancers at the NYSE and an 11-to-10 lead at the Nasdaq. The lack of strong selling interest after big gains since late October was its own support factor for stocks, along with a buzz of M&A activity, highlighted by Nippon Steel's $55.00 per share all cash offer for U.S. Steel (X 49.59, +10.26, +26.1%), and a fear of missing out on further gains.
Nine of the 11 S&P 500 sectors registered gains while two of them declined. The communication services (+1.9%) and consumer staples (+1.1%) sectors climbed more than 1.0%. Meanwhile, the rate-sensitive real estate (-0.4%) and utilities (-0.3%) sectors were alone in the red by the close.
The Treasury market experienced modest selling activity, especially in longer-dated tenors. The 2-yr note settled unchanged at 4.46% and the 10-yr note yield rose three basis points to 3.96%.
That price action was partially related to rising oil prices ($72.82, +1.42, +2.0%), which followed reports of several shipping companies, including BP, suspending travel through the Red Sea because of attacks on vessels by Houthi militants.
Treasuries has also been reacting to Chicago Fed President Goolsbee (2023 FOMC voter) telling CNBC he was a bit confused by the market's reaction to the latest FOMC meeting/comments, and Cleveland Fed President Mester (2024 voter) telling FT that the market is a little bit ahead of the Fed's rate-cut view. San Francisco Fed President Daly (2024 FOMC voter), however, said she thinks it's appropriate for the Fed to begin looking ahead to lowering rates in 2024, mindful not to over tighten, according to The Wall Street Journal.
The fed funds futures market still aligns more closely with the views of Ms. Daly rather than of Mr. Goolsbee and Ms. Mester, maintaining a line on six rate cuts by the Fed before the end of 2024, with the first cut coming in March.
Today's economic data was limited to the NAHB Housing Market Index climbed to 37 in December (Briefing.com consensus 38) from 34 in November.
Tuesday's economic calendar features November Building Permits (Briefing.com consensus 1.46 million; prior 1.487 million) and Housing Starts (Briefing.com consensus 1.36 million; prior 1.372 million) at 8:30 a.m. ET.
- Nasdaq Composite: +42.4%
- S&P 500: +23.5%
- S&P Midcap 400: +13.2%
- Dow Jones industrial Average: +12.6
- Russell 2000: +12.6%
Treasuries settle little changed from Friday
18-Dec-23 15:30 ET
Dow +19.36 at 37324.52, Nasdaq +117.56 at 14931.48, S&P +27.12 at 4746.31
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
The 2-yr note settled unchanged at 4.46% and the 10-yr note yield rose three basis points to 3.96%.
Tuesday's economic calendar features November Building Permits (Briefing.com consensus 1.46 million; prior 1.487 million) and Housing Starts (Briefing.com consensus 1.36 million; prior 1.372 million) at 8:30 a.m. ET.
Energy complex futures settle higher
18-Dec-23 15:00 ET
Dow +29.32 at 37334.48, Nasdaq +107.54 at 14921.46, S&P +25.63 at 4744.82
[BRIEFING.COM] The S&P 500 (+0.6%) and Nasdaq Composite (+0.7%) are trading near their highs of the day.
WTI crude oil futures climbed 2.0% today to $72.82/bbl and natural gas futures rose 0.4% to $2.50/mmbtu. On an energy related note, the S&P 500 energy sector is one of the top performing sectors, trading up 1.2%. \
The communication services (+2.2%), consumer staples (+1.2%), and consumer discretionary (+1.0%) sectors are also showing relative strength.
Etsy rebounds off recent weakness; VFC slides in S&P 500 amid cybersecurity incident
18-Dec-23 14:30 ET
Dow +17.79 at 37322.95, Nasdaq +117.28 at 14931.20, S&P +28.59 at 4747.78
[BRIEFING.COM] The S&P 500 (+0.61%) is in second place on Monday afternoon, nabbing session highs once more over the previous half hour.
Elsewhere, S&P 500 constituents Etsy (ETSY 84.93, +4.25, +5.27%), Align Tech (ALGN 265.45, +10.44, +4.09%), and Hasbro (HAS 52.26, +1.88, +3.73%) dot the top of today's standings. ETSY rebounds off recent weakness, ALGN was granted FDA clearance for the Invisalign Palatal Expander System, while HAS announced an unchanged quarterly dividend this morning.
Meanwhile, V.F. Corp (VFC 18.40, -1.51, -7.58%) slides to the bottom of the index, peeling off recent gains amid news of a cybersecurity incident; the company said the incident is likely to have a material impact on the business operations.
Gold modestly higher to begin the week
18-Dec-23 14:00 ET
Dow +7.61 at 37312.77, Nasdaq +104.75 at 14918.67, S&P +25.45 at 4744.64
[BRIEFING.COM] With about two hours remaining on Monday the tech-heavy Nasdaq Composite (+0.71%) holds a decent lead, marching steadily higher over the last half hour.
Gold futures settled $4.80 higher (+0.2%) to $2,040.50/oz.
Meanwhile, the U.S. Dollar Index is narrowly lower to $102.53.
Page One
Last Updated: 18-Dec-23 09:04 ET | Archive
Another step forward on M&A activity
Seven is a lucky number and there has been a whole lot of luck (and gains) since late October for the major indices, which posted their seventh straight week of gains last week. The bid for eight straight weeks of gains begins today and the futures market suggests the indices will at least take a step forward to that end when trading begins.
Currently, the S&P 500 futures are up 15 points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 33 points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 63 points and are trading 0.1% above fair value.
It is a modest bid, but a positive leaning one nonetheless, supported by a buzz of M&A activity, seasonality, and price action momentum that has yet to go off the rails.
The marquis M&A item is Nippon Steel's $55.00 per share all-cash offer to acquire U.S. Steel (X). Another purchase order includes Masonite (DOOR) making a $3.0 billion, or $41.00 per share cash-and-stock offer, to acquire PGT Innovations (PGTI).
An M&A headline with a different hue, but drawing no less attention, is the word from Adobe (ADBE) and Figma that they have mutually agreed to terminate their $20 billion merger agreement.
Another news item of note is a Bloomberg report that more Chinese agencies and government-backed firms have ordered staff to stop bringing Apple's (AAPL) iPhones. AAPL share are down 0.7% in pre-market trading. Otherwise, the corporate news flow is on the lighter side this morning, yet some macro items are filling that void.
Oil prices ($73.15, +1.66, +2.3%) are on the rise amid rising tension in the Red Sea related to attacks on shipping vessels by Houthi militants. Several shippers have suspended travel through the Red Sea, according to CNBC, including BP (BP).
The bump in oil prices should be a boon for the energy stocks today, and they could use it. The S&P 500 energy sector is down 8.1% this quarter, largely because oil prices have ben falling, versus a 10.0% gain for the S&P 500.
Separately, there continues to be a lot of focus on the market's rate-cut expectations. Chicago Fed President Goolsbee (2023 FOMC) told CNBC this morning that he was a bit confused by the market's reaction to the latest FOMC meeting and that inflation has still not hit the Fed's target. He pointed out simply that the market's expectations for rate cuts is greater than the Fed's September projection. Cleveland Fed President Mester (2024 FOMC voter) for her part told FT that the market is a little bit ahead of the Fed's rate-cut view.
Those views notwithstanding, the 2-yr note yield is down three basis points to 4.43% and the 10-yr note yield is unchanged at 3.93%.
-- Patrick J. O'Hare, Briefing.com
Masonite International opens the door to the M&A market with buyout of PGT Inc. (DOOR)
Masonite International (DOOR) opened the door to the M&A market this morning, announcing its intention to acquire impact-resistant frame window and door maker PGT Inc. (PGTI) in a cash-and-stock deal valued at $3.0 bln. The transaction amounts to $41/share with PGTI shareholders receiving $33.50 in cash and $7.50 in common stock of DOOR, which represents a fairly modest premium of about 14% over last Friday's closing price. However, PGTI had already doubled in price on a year-to-date basis and reached all-time highs last Thursday, leaving less room for DOOR to offer an attractive price that it would be comfortable with.
- Still, DOOR is selling off sharply in the wake of this news even though it's only paying about 8x next year's earnings for PGTI. The main issue is that the company is partly financing the deal with new debt and/or equity, negatively affecting its EPS. Furthermore, investors may be questioning the timing of making a big splash in the M&A market when the company already has plenty on its plate and is trying to turn its own business around.
- In each of the past two quarters, DOOR's revenue has declined on a yr/yr basis, following flat revenue in 1Q23. During its Q3 earnings call in early November, DOOR noted that rising mortgage rates were continuing to put pressure on its end markets. The company saw "considerably softer demand" in both the new construction and the repair and remodeling markets, causing EPS and revenue to fall by 19% and 3.5%, respectively.
- Perhaps market participants would feel a little more comfortable if DOOR's business was starting to turn a corner and it could completely focus its attention on integrating the acquisition. Overall, though, we do believe that PGTI is a good fit for DOOR from a strategic and financial standpoint.
- PGTI's heavy-duty aluminum and vinyl frames are made to withstand hurricane-force winds and will nicely complement DOOR's more traditional interior and exterior residential doors. While PGTI has also been impacted by higher mortgage rates, its business has been a little more resilient.
- Last quarter, sales in the southeast segment grew by 5% to a record of $303 mln with strength in new construction (+6%) and repair and remodeling (+5%).
- A broader, more diversified product portfolio is a key positive to this deal, but DOOR also expects to realize approximately $100 mln in annual synergies over the next several years due to a combination of cost-saving and sales growth opportunities.
- In particular, the company should experience more cross-selling opportunities as it sells to a larger, more diverse customer base. Importantly, the transaction is expected to be accretive to DOOR's EPS in the first full year of ownership and accelerate thereafter, despite the use of new equity and/or debt to finance it.
Although the idea of taking on more risk in an environment that's already very challenging isn't going over very well today, we do believe the acquisition could ultimately provide DOOR with a much-needed growth catalyst, especially if easing rates provide the business with a jumpstart.
Illumina sustains recent upward momentum after announcing plans to divest Grail (ILMN)
Illumina (ILMN +1%), a genetic sequencing tools supplier, ticker higher today after announcing its plans to divest Grail, a healthcare company focused on early cancer detection, which Illumina acquired over two years ago. Due to pending ongoing regulatory and legal review by the European Commission (EC), Illumina kept Grail as an independent unit at the time. Illumina noted that because Grail had no business in the European Union (EU), it believed the EC did not have jurisdiction to review the merger.
However, the EC has been investigating the proposed merger from day one, with reports in early October indicating that the Commission wants Illumina to sell Grail. With Illumina submitting a Form 10 to the SEC and evaluating the divestiture options for Grail earlier this month, it seemed that it was only a matter of when Illumina would finally have to let go of its Grail purchase. Over the weekend, Illumina announced that it would execute a third-party sale or capital markets transaction of Grail, consistent with the EC's order, finalizing the terms by the end of 2Q24.
Following Illumina's decision, activist investor Carl Ichan, who nominated three directors to Illumina's Board in March and was vocal in his opposition to the Grail purchase, issued a letter to the shareholders. Consistent with his previous tone earlier this year, Mr. Ichan expressed his frustration surrounding Illumina's legacy directors, pointing to a clear violation of EU law when closing the Grail transaction, costing Illumina €432 million (which is currently appealing). In total, Illumina racked up $4.7 bln in impairment costs.
With this misstep behind Illumina, the company may finally find its footing. Shares have tumbled over 35% this year, hitting a 10-year low last month.
- Even though Grail enjoyed a 110% jump in revs yr/yr to $21 mln in Q3, it remained a drag on Illumina's operations, posting a non-GAAP operating loss of $155 mln. Making matters worse, Illumina cut its forecast for Grail, expecting FY23 sales to be at the low end of its $90-110 mln projection.
- At the same time, Illumina has been facing unfavorable macroeconomic and geopolitical developments, including declining demand in China and lengthened sales cycles from customer purchasing constraints. Management stated that its initial views regarding 2024 look similar to 2023, meaning no improvement to current headwinds over the near term. However, there was a silver lining. Illumina was encouraged by the early signs it was seeing for NovaSeq X utilization, a new product that could lift future demand.
- Illumina is amid cost savings initiatives. The company has already reduced its annualized run rate expenses by around $175 mln, ahead of its initial target of $100 mln.
While major indices have been hitting one-year highs, Illumina is trying to mount a rally off decade lows. There are still a few lingering uncertainties surrounding its Grail divestiture. For example, if Illumina sells it outright, it may not receive as much as if it seeks a spin-off. Nevertheless, divesting Grail should remove a significant overhang from Illumina.
US Steel garners rich premium as it agrees to be acquired by Nippon Steel (X)
There was some big M&A news in the steel space over the weekend. Nippon Steel, Japan's largest steelmaker and one of the world's largest steel manufacturers, will acquire US Steel (X +27%). The deal price is $55 per share, all in cash, representing a total enterprise value of $14.9 bln. The transaction has been unanimously approved by the Board of Directors of both companies and the deal is expected to close in Q2 or Q3 of 2024.
- US Steel has been undergoing a multi-month strategic review. There were reports last week from CNBC that US Steel was weighing a number of bids over $40. However, we think investors are surprised to see this lofty $55 deal price, which represents a 40% premium over Friday's close of $39.31. And the all-cash nature made it even more attractive. Cleveland-Cliffs (CLF) made a bid for X in the $35 range in August, but that was cash-and-stock. It was smart of X to hold out for a better deal.
- In terms of the rationale, Nippon wanted to expand internationally. This deal adds to its primary geographies of Japan, ASEAN, and India. Nippon also has wanted to get larger. Including US Steel, that will bring its annual crude steel capacity to 86 mln tons, getting Nippon closer to its goal of 100 mln tons annually. US Steel will retain its name and Nippon says it will honor all existing union contracts.
- US Steel also provides Nippon with exposure to a diverse array of end markets, including automotive, construction, consumer (packaging and appliance), electrical, industrial equipment, oil country tubular goods (OCTG) etc.
- On perhaps a bit of the negative side, US steel's facilities are generally older and they rely more on more expensive union labor. There are generally two methods to make steel: there are the integrated producers (CLF, X), which basically make steel from raw materials (iron ore, coke) by melting it in a huge blast furnace. Mini-mills (CMC, NUE, STLD) make steel from melting scrap in electric arc furnaces. Mini-mills are generally more efficient because they can more easily start and stop based on demand whereas a blast furnace is pretty much always on. However, X did add exposure to mini-mill technology with its recent acquisition of Big River Steel.
Overall, we think this is a very good deal for US Steel shareholders due to its rich premium and all-cash structure. It certainly proves management was right in rejecting CLF's more modest offer this past summer. For Nippon, it diversifies the company geographically by giving it more of a foothold into the US market. The premium does seem high, but X apparently had multiple offers and that is what it took to close the deal.
Scholastic Corp's investors turn the page on the stock following rough Q2 report (SCHL)
Scholastic Corp (SCHL), the publisher and distributor of popular children's and young adult books such as Harry Potter, Hunger Games, and Dog Man, experienced weakness again in its school-based channels during its seasonally important back-to-school second quarter. As a result, EPS fell short of expectations and the company cut its FY24 revenue guidance, forecasting revenue to be flat yr/yr versus its prior guidance of 3-5% growth.
- School book club revenues plunged by 44% yr/yr to $32.4 mln, causing revenue for the Children's Book Publishing and Distribution segment to fall by 6% to $392.8 mln. The drop in book club revenue was partly planned as SCHL cut back on unprofitable promotional offers, but external factors are mostly to blame.
- During the earnings call, CEO Peter Warwick highlighted the increasingly complex and challenging U.S. school environment that SCHL is facing. More specifically, he discussed how schools and school boards have become more polarized, and how student absenteeism has grown at the same time that teacher shortages have increased.
- These factors are combining to put greater demands on schools and teachers, including more restrictions on teachers, parents, and kids regarding how reading is taught.
- Adding to the problem, a slowdown in consumer spending has slowed sales in the School Reading Events division. The company expects these industry-related and macroeconomic headwinds to persist for the remainder of the school year, prompting it to lower its FY24 guidance.
However, there is some good news to share.
- SCHL has been buying back stock -- $58 mln worth during Q2 -- and it plans to buy even more stock as it approved an additional $66 mln to its share repurchase authorization. This vote of confidence stems from SCHL's positive longer-term outlook, which is largely based on its strong positioning in the children's book market and the prioritization of literacy among educators and families.
- Furthermore, in recent weeks the company has seen signs of a sales rebound for its school-based business, suggesting that the worst of the decline may be in the rearview mirror.
Overall, it was clearly another disappointing earnings report for SCHL, especially since Q2 is its most important quarter as it includes the back-to-school season. The enhanced share buyback program does offer some solace, but after back-to-back rough quarters, SCHL will remain a "show me stock" until the company starts delivering stronger results.
Hershey Foods' struggles continue following a downgrade at BofA Securities today (HSY)
Investors remain bitter toward Hershey Foods (HSY -1%) today following a downgrade to "Neutral" from "Buy" at BofA Securities. Analyst downgrades have become the norm for HSY lately, with four separate brokerages lowering their ratings on the stock in just the two months since the company topped Q3 earnings and sales expectations.
Briefing.com notes that the latter half of this year has not been too kind toward HSY, with shares constantly grinding lower since achieving all-time highs in May, immediately after the company's impressive Q1 report. With the stock beginning to consolidate after an over -30% drop in the past six months, perhaps HSY is carving out a bottom.
While headwinds, including a surge in popularity of weight-loss drugs (GLP-1s) and stubborn cost inflation, remain present, several encouraging trends may trigger a more meaningful turnaround.
- Adjusted gross margins have been steadily expanding this year. After several price hikes, HSY likes its current positioning across the categories in which it competes. While further pricing action is not off the table, to counter cost inflation, HSY is leaning on upcoming capacity that should come online in the near future. Management mentioned that demand remains healthy, but it has not been able to capitalize on it, particularly in its Sweet segment. Adding more capacity should help increase productivity, which should keep margins afloat.
- Volumes have held up despite consistently rising prices. While volume growth has been up and down throughout FY23, it never fell by more than low single digits. HSY's product portfolio is filled with familiar brands from which consumers are unlikely to trade down. While management did note that it has seen a minor uptick in private labels, it remains a "very small" part of its business. We find it unlikely for generic brands to steal a material percentage of sales away from many of HSY's powerful brands, like Reese's and Hershey Kiss.
- HSY is currently unaffected by the rise in GLP-1s and does not anticipate the drugs to have a material impact on its business over the immediate term. While it is still too early to tell if weight-loss treatments will eat into HSY's overall growth over the long term, like other snack food titans, including PepsiCo (PEP) and Conagra (CAG), HSY is not overly concerned. If adoption rates begin to climb rapidly, there are levers HSY can pull to offset potential damage, including bolstering its portfolio of smaller snack sizes and exploring opportunistic M&A.
HSY has been amid a lengthy decline since May, similar to its peer group. However, separating it from the field of consumer packaged goods companies is an impressive market share, with estimates placing it at a nearly 50% share of the U.S. chocolate market, and a robust portfolio of hard-to-replicate products. While downward pressure may linger through 2023 as investors harvest tax losses, HSY may be close to a bottom, with plenty of upside heading into the new year.
The Big Picture
Last Updated: 15-Dec-23 15:40 ET | Archive
Rate-cut sugar plums dancing in market's head
Could things have gone any better for the market this past week? If one wants to be literal about it, then, yes, things could have been better, but a fair summation is that this past week was a banner week for the stock market and the Treasury market, which have been kindred spirits since late October.
The equal-weighted S&P 500 is up 4.1% for the week as of this writing, whereas the 2-yr note yield is down 36 basis points for the week to 4.38% and the 10-yr note yield is down 32 basis points for the week to 3.91%.
Don't look now, but the 2-yr note yield is down four basis points for the year while the 10-yr note yield is just three basis points away from being unchanged for the year.
It has been a stunning turn of events, and it got even more stunning this past week when Fed Chair Powell stunned the markets with some surprisingly dovish-sounding insight into the Fed's thinking.
All Rolled into One
Fed Chair Powell had the chance to be the policy Grinch who stole Christmas. Instead, he was Santa Claus, Rudolph, and Frosty all rolled into one.
- Santa Claus (ho-ho-ho!): "The question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today."
- Rudolph (won't you guide my sleigh?): "We're aware of the risk that we would hang on too long, you know. We know that that's a risk, and we're very focused on not making that mistake."
- Frosty (Happy Birthday!): "Fed would need to reduce restriction on economy well before 2% inflation."
From "Two Behind" to "Three Behind"
The market responded like a child rounding the corner and seeing the presents under the tree for the first time on Christmas morning.
Wide-eyed in near disbelief at what they saw and heard from Fed Chair Powell, Treasury yields cascaded lower and stock prices took another parabolic step that sent the Dow Jones Industrial Average to a record closing high and the S&P 500 within striking distance of its own record closing high.
Santa's helpers played a part, too. The stocking stuffer was the Summary of Economic Projections, which showed a median estimate for three rate cuts in 2024 versus two previously.
It didn't matter that the fed funds futures market had four rate cuts priced in for 2024. The takeaway for the market was that the Fed is coming closer to the market's thinking rather than staying stuck in its ways and remaining further away from the market's thinking.
The irony is that the Fed is technically further away from the market's thinking today than it was ahead of this week's FOMC meeting. Again, the median estimate in September called for two rate cuts in 2024, so the Fed was "two behind" the four cuts expected by the market for 2024 going into this week's meeting. Now, the fed funds futures market is pricing in six rate cuts (!) in 2024, which means the Fed is now "three behind" the market's expectations.
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| March 2024 | 5.00-5.25% | 69.5% | | May 2024 | 4.75-5.00% | 58.5% | | June 2024 | 4.50-4.75% | 54.7% | | September 2024 | 4.25-4.50% | 80.5% | | November 2024 | 4.00-4.25% | 66.9% | | December 2024 | 3.75-4.00% | 58.8% | FOMC Meeting Target Range Probability Source: CME FedWatch Tool
The market, however, remains inclined to think that the Fed will follow the course that is being set for it. Whether that is truly a good thing remains to be seen. We have discussed before that it is one thing to cut rates because inflation is falling toward the 2% target on its own supply chain accord. It is another thing to cut rates because economic growth is falling by the wayside and into recession.
The latter would not be good for earnings prospects.
For now, though, the market is of the belief that Rudolph will help Santa Powell land the economic sleigh softly, and so far, the economic data is cooperating with that view.
Conveying a Policy Pivot
The source of all the excitement this week was the recognition that Fed Chair Powell had a chance to sound overtly hawkish given the easing in financial conditions that could make it harder to get inflation back down to target, but he instead chose to walk a more dovish-minded path.
By doing so, he was deemed to have conveyed a Fed policy pivot away from a tightening bias.
Naturally, the Fed Chair made it clear that the Fed is prepared to tighten policy further, if appropriate, but he also made it clear that the policy directive was crafted in a way to acknowledge that the Fed is at, or near, the peak rate for the cycle. The market interpreted that as some necessary lip service, which is why it focused on the unexpected remark that rate cuts were discussed and that the Fed is very focused on not making the mistake of hanging on too long with its policy restraint.
New York Fed President Williams (permanent FOMC voter) made an attempt seemingly to walk back some of the market's excitement about the Fed policy shift, telling CNBC in an interview on Friday that the Fed isn't really talking about rate cuts right now and that it is premature to think about the timing of rate cuts.
Ostensibly, the market is quite premature then, because all it has on its mind these days is multiple rate cuts from the Fed in 2024, beginning in March.
Atlanta Fed President Bostic (2024 FOMC voter) preyed on the market's rate-cut expectations as well on Friday, talking like the Ghost of Christmas Yet to Come in telling Reuters that he expects two rate cuts in 2024, starting in the second half of the year.
What It All Means
The year ahead will be another battle of interest rate expectations. The market is gliding into the new year, however, with a confident sense that it will have its Christmas cake and eat it, too, with a series of rate cuts in 2024 that are more passive than active in nature.
What we mean by "passive" is rate cuts that happen with inflation gliding back to target in an easy economic manner, as opposed to "active" rate cuts that happen because the economy is foundering under the weight of prior rate hikes and/or a Fed that stayed restrictive too long.
In listening to Fed Chair Powell, he seems to be entertaining the passive glide path, which is why it was showtime this past week for him and the market.
The questions now are, when will it be go time and why?
The answers will matter greatly in the 2024 outlook for the stock market and the Treasury market, which are closing out 2023 with visions of rate-cut sugar plums dancing in their head.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: The next installment of The Big Picture will be posted December 29.)
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