Investors are displaying an intriguing asymmetry in their reaction to Federal Reserve (Fed) comments, favoring dovish remarks while overlooking hawkish sentiments. Fed’s Thomas Barkin’s suggestion that the Fed could cut rates if recent progress in inflation continues propelled the Nasdaq 100 to a fresh record for the third consecutive day and pushed the S&P500 to a fresh year-to-date high, nearing an all-time high as well. However, warnings from other central bankers about the potential premature nature of rate cuts did not elicit the same enthusiastic response. The prevailing trend suggests that investors are more inclined to embrace dovish signals, viewing hawks less favorably, potentially setting the stage for a Santa rally.
Despite the market’s positive response, there seems to be no rational explanation for this asymmetric reaction, particularly considering ongoing economic strength in the U.S. The latest economic data indicates robustness, a scenario that, theoretically, should align with the sentiments of Fed hawks. Investors’ hopes for aggressive rate cuts in the midst of strong economic growth may not be conducive to easing inflation and maintaining it at sufficiently low levels.
The recent results from FedEx, often considered a gauge of economic activity, failed to impress investors. The company missed expectations due to declining airfreight and trucking volumes, leading to a 7% drop in its stock price after the closing bell. This negative reaction signals potential challenges for the broader market, especially as the previously observed negative correlation between FedEx and the U.S. 10-year yield may be on the verge of breaking.
Zooming out, the S&P stocks are trading at nearly 20 times the 12-month earnings estimates, and the trailing 12-month EPS estimate is at a record, raising questions about the overall earnings performance of S&P500 companies. The current valuations suggest an economy that may not require looser financial conditions.
Dollar weakness persists despite positive housing data in the U.S., indicating a potential disconnect between economic health and the dollar’s performance. U.S. deposits, which were elevated during the peak of the pandemic, are reverting toward pre-pandemic levels, potentially slowing U.S. consumer spending. However, economic growth projections and recent GDP data may challenge the dovish optimism of the Fed.
As concerns mount over developments in the Red Sea, inflation numbers from Europe and Britain offer some relief. Eurozone inflation slowed to 2.4% in November, and core inflation fell to 3.6%. In the UK, both headline and core inflation fell faster than expected in November. While this provides some respite, concerns about global implications and hawkish expectations from the Bank of England (BoE) may limit the selloff in the pound if investors continue to move away from the U.S. dollar amid softening Fed expectations.
