Nasdaq rally answers trader’s question: are we there yet?

Whatever Fed Chair Powell said yesterday, traders believe they heard that interest rates have peaked. Bond markets bounced, with yields moving back from recent highs. Rate-sensitive stocks, notably banks, and the tech-heavy Nasdaq, led the market rally and are up 5% this week.  The dollar was weaker on the prospect of lower interest rates.

Bottom line: Risk-on.

TODAY’S MAJOR NEWS

Traders hear what they want to hear: no more rate rises

For months, traders have asked, ‘Are we there yet?’ on rate rises. They believe the Federal Reserve has provided enough subtle hints to traders that we may have seen this cycle's last rate hikes. While the Fed did not say that while leaving the door open for another hike, that’s what the market heard on Wednesday. Hence, the stock market rallied, prompting lower bond yields and led by rate-sensitive banks and tech stocks.

Fed Chair Jerome Powell tried his best to sound hawkish, but the traders weren’t buying it. At this week's meeting, the Fed continued to hold its benchmark interest rate at 5.25 – 5.50% while continuing to unwind its balance sheet. Yet, Powell’s comments were perceived to be dovish, sending Treasury yields tumbling, with the dollar following them lower.

Powell insisted that policymakers are not considering rate cuts, but he acknowledged that higher longer-term rates and the strong dollar are doing much of their work. The Fed’s next interest rate move is data-dependent, and progress has been made in reducing inflation, but for now, traders believe in cuts.

Rapidly rising debt issues meets diminishing buyer pool

The lingering problem finally starting to get attention, though, is the rapidly rising national debt's impact on the sale of Treasury notes. This comes at a time when Japan is unwinding its yield curve controls. Japan is our biggest foreign buyer of US debt certificates, but it, along with China and the Federal Reserve, is decreasing purchases as the supply of the certificates increases. That tends to support higher yields to attract buyers.

The question now is, does the average baby boomer feel more comfortable following this week’s developments, increasing their willingness to shift money from the equities to Treasuries, filling a portion of that need for new buyers of debt certificates, or is the current drop in yields following yesterday’s Fed meeting merely a correction in an otherwise rising rate environment?

Unemployment claims hint at softening jobs market

While low, weekly and continuing claims numbers have trended higher recently, suggesting a softening jobs market. When the government releases its monthly jobs report, we’ll get better data on that tomorrow.

Yesterday’s JOLTS report showed increased job opening postings, but that data was from September. Things seemed to have taken a turn in the jobs market in October. This morning’s Challenger Job-Cut report reflected notices to lay off just 36,836 employees, down from 47,457 last month, which was modest.

• First-time claims for unemployment benefits rose to 217,00 in the week ending October 28, slightly more than expected, up from 212,00 last week
• This increases the four-week moving average to 210,000, up from 208,00 the last week
• Continuing claims for the week ending October 21 rose by 35,00 to 1.818 million, with the four-week moving average rising by 36.5K to 1.758 million

Falling unit labor costs are good news for inflation

Today’s productivity and unit labor costs data is good news for inflation and suggests a softening labor market, as employers utilize technology to increase efficiencies to reduce labor costs, together with signs of a slowing economy.

• Non-farm productivity rose at an annualized rate of 4.7% in the third quarter, ahead of the forecast 4.2%, up from 3.6% in the second quarter
• Unit labor costs fell at an annualized rate of 0.8% as a result of the increased productivity, much better than the forecast 0.7% increase and3.2% gains seen in the second quarter

TODAY’S MAJOR MARKETS

Nasdaq rally gains steam

• The Nasdaq, S&P 500, and Russell 2000 all rose 1.5% today as traders bet on no more rate rises and a possible rate reduction
• Foreign equity markets were strong, with a 1.5% rally in the DAX, 1.4% in the FTSE 100, and 1.1% in the Nikkei 225
• The VIX, Wall Street’s fear index, fell back to 16.2 (the year’s low was 13.0)

Bonds rally, dollar declines

• 2-year yields rose modestly to 5.00%, while 10-year yields which most heavily influence equities, fell to 4.68%
• The dollar index fell 0.6% to 106.3
• Versus the dollar, the Yen, Sterling, and the Euro were all up 0.3%

Oil slips further

• Crude oil rose 2.1% to $80.8 per barrel, back to the top of its year-to-date range
• Spot gold prices rose 0.1% to 1,990 per ounce, and Silver rose 0.3% to $22.9 per ounce
• Wheat and soybean prices were in the green after recent price action made them attractive on the world market
• Corn prices continue to get the short end of the spread, lacking a fundamental story

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com