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Markets are near record highs, but the final chapter of 2024 depends on this week’s CPI numbers. Will we end the year with a rally or a reality check?
So far… so nice. The markets are at or near all-time highs. The US will have a new President sitting in the Oval Office in little more than a month; one with a few rather non-conventional policy proposals. There are still 2 active wars going on. A regime in the middle east has just fallen, creating a power vacuum for who knows what. One of the world’s largest global traders in Asia is a big question mark with political turmoil threatening anything from a tempest in a teapot through a global supply chain meltdown. France’s Prime Minister is now France’s former Prime Minister after he resigned in the wake of a non-confidence vote. Bitcoin, a digital currency, whose mystery founder owns at least 5.6% of the total supply, which nobody on the planet has any real math to value, jumped over 100,000 last week for many anecdotal reasons and no quantitative ones whatsoever. Unfounded multiple expansion is rapid and rampant. We are in the last month of a so-far winning year for stocks. This is all a perfect setup for a yearend rally!
One can easily just close up shop now and start to get into the holiday spirit, right? Why not just give in to a, so-called, “Santa Clause Rally?” Last week, I could be spied about town, in my notes, and on live TV, talking about “naughty or nice week.” It was a week full of important economic releases that would inform the Fed in the final rate decision of its big pivot year. Economic numbers leading up to last week had been relatively benign. Disinflation was possibly taking a breather, but nothing too severe as to sound the alarm. The overall economy was steaming ahead at a slower but still quite respectable pace. Really, there was no strong informant on which way the big bankers would lean in its final FOMC meeting. Slowly but surely, the market began to factor in something near even odds of a final meeting rate cut. Last week, I likened the situation to a coin landing on its side waiting for a swift breeze – or just the right economic release to push it to one side.
It was a week chock-full of employment information, and the Fed is, after all, responsible for maintaining a healthy labor market. And, to boot, a mid-year swoon in that labor market was most likely responsible for the Fed’s 50 basis-point cut in September. Numbers suggesting a stronger labor market could have easily derailed any hopes of one final cut this year, which would likely trip up any final bull run for 2024. On the flip side, a weak number could have brought out fears of an economic slowdown, which could have also sent overbought stocks into a tailspin for the holidays. There were at least three warm-up numbers leading up to Friday’s main act, JOLTS Job Openings, ADP Employment Change, and weekly Initial Jobless Claims, and all three came in within the bounds of “acceptable.” SO, it all came down to the Bureau of Labor Statistics’ monthly Employment Situation release.
That group of numbers, released last Friday morning, came up ambiguous enough to… well, kick the can down the road. New payrolls came in slightly greater than expected, rebounding from last month's weak showing. The Unemployment Rate ticked up slightly, not quite enough to get the Fed worried but also not bad enough to scare the bulls. So, really nothing. I read something this morning where the writer said the number may have been received differently if traders knew that the uptick to 4.2% was within two one-hundredths of a percent of being rounded up to 4.3% instead of being rounded down to 4.2%. Perhaps, and I agree, but alas, not. No, the numbers were taken as a no-change. This gave overall market sentiment a chance to place its vote, and it was in favor of a continued rally.
Stocks rallied on the news propelling all indexes except for the Dow Jones Industrial Average higher. The Dow was held back by a large decline in UnitedHealth. Also in response, Fed Funds futures upped their predictions for a 25 basis-point cut to 85% from 70%. Both are pretty good odds by Wall Street standards, but the increase certainly helps. Also upped was the probability for 75 basis points of cuts for the whole of 2025 which went from 35% to 57%. While still not a done deal, greater than even odds can be placed in the “possible” category.
So, is that it, will we get a naughty rating or a nice rating? Well, unfortunately, I would say neither. It is still a “maybe,” which if you remember from growing up is really like a “no,” but open to have my mind changed from your parents. What can turn that “maybe” into a “nice?” It turns out that this week, we will get inflation numbers, and those, my friends, are what should give the Fed what it needs to make its decision. Inflation, after all, was the reason for the season; the season being aggressive rate hikes that dotted 2022 and 2023. In fact, I would say, that anything short of a super-hot CPI print should get us a “ho-ho-ho,” instead of a “no-no-no.”
FRIDAY’S MARKETS
Stocks had a mixed close on Friday after employment numbers came in near expectations, sparking hopes of further Fed cuts for the year. The University of Michigan survey showed continued increases in consumer sentiment amidst growing estimates of higher inflation in a year.
NEXT UP
- Nothing this morning, but later this week we will get BFIB Small Business Optimism, Consumer Price Index / CPI, Producer Price Index / PPI, and weekly jobless claims. We will also get a few important earnings announcements. Download your weekly economic and earnings calendars so that you can be the first of your friends to know if we will get naughty or nice in next week’s FOMC meeting.
- After the closing bell earnings: C3.ai, Vail Resorts, Toll Brothers, MongoDB, and Oracle.
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