Equities were up this week, driven by the surprising dovish announcement from the Fed. In addition, the lower quality stocks jumped as well due to high volatility and short squeezes. Dow went up and hit its new record high, and all 3 major equity indices jumped to year-to-date highs.
Dovish: The produce price index came in weak, indicating a cooling inflation. In response, Fed signaled 3 cuts for next year - one more cut than expected. Inflation forecast comes down to 2-2.2% over the next 3 years. Market is pricing 150 bps cuts in 2024.
Other Central Banks: In contrast, European Central Bank (ECB) and Bank of England (BoE) showed no signs of rate cuts. Markets are expecting the rate cut cycle in eurozone will start in 2024 Q2, with a lower government yield forecast across most of the G10 countries.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: A basket of unprofitable tech stocks shot up 8.9% on the week due to the lower interest rates and short covering. Biotech stocks also rebounded after some investors wrote off the names in the sector when they hit the lows in October. The basket of stocks increased 31% and turned positive on the year recently, partly driven by the recent M&A activities which sparked investors’ interest.
Morgan Stanley: We believe the dropping rates may not be as stimulative as other periods. Also, the skewed and concentrated equity index is rare, which potentially obscures the impact of the cyclical tailwinds.
J.P. Morgan: Small caps are likely to outperform large caps. Small caps are more sensitive to rates as they have more floating debt, and their fixed debt has shorter maturity on average. They are also more geared towards the economic cycle as they have higher leverage. On the other side, the risks are that inflation is more sticky than expected and the change in economic outlook.
Morgan Stanley: Relative stock-bond performance has reversed in 10 out of 12 policy pivots in the last 55 years, with stock lagging. Investors should be careful about a rate cut, as it is usually linked with slow growth, higher unemployment and decreasing prices. We believe next year is a year for bonds.
UBS: Amid the hope for aggressive monetary easing, both equities and bonds rallied rapidly, while we believe the pace of the recent rally is not sustainable and investors are overlooking some of the risks. Markets could be disappointed by the pace of rate cuts due to the resilience of economic data in the US.
Barclays: In Europe, the PMI data surprised to the downside. As the hard data is deemed as weak at the start of the quarter, it is not easy to avoid a technical recession.
Standard Chartered: In 2024, the US and other major economies are expected to experience slower growth and sliding inflation. We remain cautious on the market as the macro winds may shift towards a harder landing.
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