Gold jumped to a record high amid mounting expectations of rate cuts next year, while stocks enjoyed a mixed open on Monday after a strong week that saw the S&P 500 notch up a fresh year-to-date high. Equities rallied on Friday along with bonds, with worse-than-expected US ISM data underlining the slowing economy narrative.
Attacks were reported on US ships in the Red Sea, raising fears about escalation in the Middle East, although this did nothing to boost crude prices as oil sank for a third day to retest the mid-November lows – nothing for Opec to cheer. Meanwhile, Venezuela voted to claim sovereignty over an oil-rich region of neighbouring Guyana – there have been rumours of military action being a possibility. The dollar firmed up a bit and bitcoin rose above $40,000.
The FTSE 100 slipped about 0.3 per cent in early trade as oil prices dragged on the energy majors. It rose 1.5 per cent last week amid broad positivity for stocks as yields dropped. In Frankfurt, the Dax rallied a quarter of a per cent to approach the all-time high from the summer. The CAC in Paris was steady. Wall Street’s indices rallied on Friday, with the S&P 500 closing at its highest since March 2022, while the Dow Jones extended its run to take its year-to-date gains to more than 9 per cent. Markets seem to be pricing in a lot of good news despite economic growth wobbling – perfect disinflation, a super-dovish Fed… too good to be true? Companies and markets have adapted to higher rates well, but the recent drop in bond yields betrays an exuberance that seems to be very optimistic.
Federal Reserve chair Jay Powell pushed back against the market pricing in aggressive rate cuts in 2024 and said inflation is still "well above" target. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” he said. He can push back all he likes but the market is not listening – odds of a cut as soon as March stand at 60 per cent.
Gold spiked higher overnight to take out record highs above $2,100 as real rates came under increasing pressure; the 10-year Tips yield is testing 2 per cent while the benchmark 10-year Treasury yield held below 4.25 per cent. This morning gold touched a new all-time high at $2,148 before turning sharply lower in a sudden reversal. The rise all seems to be based on aggressive rate cuts by central banks next year that may not appear. Read more on the gold price here.
Then Friday is jobs day! A month ago, the data was confirmation bias for many that the Fed is done. Non-farm payrolls increased by 150,000 in October, while the previous month was revised down quite a bit. That NFP print helped cement the narrative that the Fed is not only done with hikes but may be aiming to cut soon. This week’s report is the last major piece of economic data ahead of the Federal Open Market Committee’s 12-13 December meeting. The headline number is forecast at 185,000, wages +0.3 per cent and the unemployment rate 3.9 per cent.
The Trader is written by Neil Wilson, chief market analyst at Finalto
