December 14 – All is well in the world of commodities and equities, at least for now, following yesterday’s statement and press conference by the Federal Reserve, with overnight gains simply limited by traders waiting for this morning’s retail sales and weekly jobs data. The VIX is trading below 12, while the dollar index is following Treasury yields lower to trade at four-month lows near 102.4. Yields on 10-year Treasuries are trading at four-month lows near 3.96%, while yields on 2-year Treasuries are trading at six-month lows near 4.35%. The broader commodity sector rallied overnight as well on Wall Street’s rosy outlook, with crude oil prices nearly 3% higher, while the grain and oilseed sector is mostly higher as well.
Retail sales rose 0.3% month-on-month in November, up from 0.2% declines in October and exceeding analyst expectations of 0.1% declines. Retail sales minus vehicles rose 0.2% month-on-month in November, beating analyst expectations of 0.1% declines, after being flat in October. Retail sales minus vehicles and gas rose 0.6% month-on-month in November, exceeding analyst expectations that they would remain at the 0.1% gains posted the previous month. Today’s numbers combine with last month’s jobs report to show a stronger economy than expected.
First time claims for unemployment benefits fell to 202K in the week ending December 9, down from 221K the previous week, and down from analyst expectations of 223K. The four-week moving average fell to 213.25K claims, down from 221K the previous week. Continuing claims for the week ending December 2 increased 20K to 1.876 million. The four-week moving average rose modestly to 1.874million. These numbers as well show a relatively healthy economy with a tight labor market. Yet, Wall Street continues to trade optimism that we will see a soft landing in 2024 with the Fed actively cutting interest rates.
The Federal Reserve made no changes to interest rates on Wednesday. In fact, it made very few changes to its policy statement – the fewest of the past year. It stated that “growth of economic activity has slowed from its strong pace of the third quarter,” versus previous wording of “economic activity expanded at a strong pace in the third quarter.” It also changed its statement that “Inflation remains elevated,” to “Inflation has eased over the past year but remains elevated.” The Fed also inserted the word “any” in the statement, “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, ….” That’s it.
The sum of the changes suggests to Wall Street traders that the Fed is done with rate hikes, although they insisted that they left that option open. Powell stated that the committee believes that we are at or close to interest rate peak per Fed policy. It will continue to shrink its balance sheet by $1.14 trillion per year. The latter is often overlooked, but it should not be. The infamous dot plot graphic calls for 3 rate cuts in 2024, followed by 4 more the following year. That graphic better represents the thinking of individual members more than the statement itself would suggest. It should also be noted that the dot plot graphics have been about as wrong as the market has been over the past couple of years, but that’s a discussion for another day. The Fed expects us to get down to the 2% inflation mandate in 2026, and to do so with unemployment having a “4” handle instead of a “5” handle. It is trying to walk a very fine line that has little if any margin for error. The VIX fell, and the dollar followed Treasury yields sharply lower on the statement release, giving a somewhat measured positive boost to stocks. Powell successfully kept the Federal Open Market Committee on the same page for yet another meeting, producing yet another unanimous decision, which has been his goal.
Stocks surged when Powell stated in his press conference that the committee had discussed the topic of rate cuts. That’s all that Wall Street needed to hear, with buyers enthusiastically buying. Traders didn’t even hear his measured hawkish statements. What does that say for the commodities? We’ve been in a “commodity deflation” mode for the past 20 months or so, with traders worried about declining demand as we head toward a highly feared recession that never showed up. Will this be what kicks us out of that mode? Perhaps, but there is often a lag before commodities see that flip in money flow – sometimes several months of lag. Powell again lamented in the press conference how core services inflation continues to be a problem – focused on wages and shelter. Some of that data is moving in the wrong direction to fit the market’s euphoria over rate cuts anytime soon, leaving me a skeptic. But overnight trade reflected a modest “risk-on” sentiment that lifted both commodities and equities.
