Wednesday's rally left little to the imagination in terms of what the stock market thought about Fed Chair Powell's remarks before The Economic Club of New York. Market participants clearly liked the Fed chair's observation that, "interest rates... remain just below the broad range of estimates of the level that would be neutral for the economy."
There was nothing neutral about the response to that view. The major indices shifted into high gear and rallied strongly into the close, registering gains between 2.3% and 3.0%.
The takeaway for market participants is that the Fed chair made a purposeful, verbal detour from the "long way from neutral" view he shared in an interview in early October. In other words, he seemingly dangled the possibility that the Fed's policy rate path may not be as steep as previously imagined.
Importantly, that isn't a promise. He reminded everyone that the Fed is not on a preset course and that it will be increasingly data dependent in its decision making.
As a reminder, the longer-run range for the fed funds rate is 2.5% to 3.5%. The current target range is 2.00% to 2.25% and that will likely be raised to 2.25% to 2.50% at the December FOMC meeting.
There is still a good bit of rate-hike scope, then, to hit the upper end of the longer-run range for the neutral rate; nevertheless, a market that was pining for some ray of hope that the rate-hike path might be less steep ran with an assumption that the neutral rate will settle in the neighborhood of 3.00% or less.
We're not saying the market is right, only that yesterday's rally was rationalized on that basis.
Things have cooled off a little this morning. The S&P futures are down 7 points and are trading 0.3% below fair value. The Nasdaq 100 futures are down 31 points and are trading 0.5% below fair value. The Dow Jones Industrial Average futures are down 23 points and are trading 0.2% below fair value.
Some early profit-taking efforts are understandable given the scope of the rally and this week's gains so far. To wit, the S&P 500 information technology sector is up 6.0% over the last three sessions.
Another element acting as a governor on the trading action is the uncertainty surrounding President Trump's meeting with President Xi on Saturday at the G20 Summit.
Will President Trump be emboldened by yesterday's strong market response and take a hard-line stance with President Xi or will he use it as an opportunity to strike a conciliatory tone that ignites a year-end rally? In other words, will he dangle another carrot for the stock market or take a bite out of the carrot Fed Chair Powell seemingly dangled on Wednesday?
The tonality of this morning's trade headlines doesn't fall on the softer side of things. A tweet from the president extols the benefits of billions of dollars "pouring into the coffers of the U.S.A. because of the tariffs being charged to China, and there is a long way to go." Separately, there are press reports suggesting U.S. Trade Representative Lighthizer is looking into raising the tariff on Chinese auto imports to 40%.
Auto imports from China, of course, are pretty negligible, yet the reported tariff aim right in front of the G20 meeting is not. To be sure, the open this coming Monday is shaping up to be an interesting one.
Today's open is not. What will be more interesting is how the stock market trades during today's session. Will the bulls continue to squeeze the bears or will they relax their grip?
This morning's economic data isn't providing any clear answers. It was mixed relative to expectations, yet the more meaningful report -- the Personal Income and Spending Report for October -- was the bright spot.
Personal income increased 0.5% in October (Briefing.com consensus +0.4%) while personal spending jumped 0.6% (Briefing.com consensus +0.4%). Real PCE, which is the component that factors into Q4 GDP forecasts, was up a solid 0.4%.
If there was a drawback on the spending side, it's that a decent chunk was driven by increased spending for household electricity and gas (i.e. non-discretionary spending).
There weren't any drawbacks on the inflation end of the report. It was tame with the PCE Price Index up 0.2% and the core PCE Price Index, which exclude food and energy, up 0.1% (Briefing.com consensus +0.2%). That left the year-over-change for the PCE Price Index at 2.0%, unchanged from September, and the core PCE Price Index at 1.8%, down from 1.9% in September.
The tame inflation readings are the key takeaway from the report since they are supportive of the Federal Reserve taking a more deliberate approach to raising the fed funds rate.
Separately, initial claims for the week ending November 24 increased by 10,000 to 234,000 (Briefing.com consensus 218,000) while continuing claims for the week ending November 17 increased by 50,000 to 1.710 million.
The key takeaway from the report is that it is apt to contribute to assertions that the bottom for the trend in initial and continuing claims may have been reached in this cycle.