Markets climb on strong economic data and falling rates

Dow rose 103, advancers over decliners about 5-1 & NAZ gained 58.  The MLP index jumped almost 4 to the 252s & the REIT index soared another 9 to 397 on lower interest rates.  Junk bond funds traded higher along with stocks & Treasuries continued to be heavily purchased, reducing yields (more below).  Oil rebounded 2+ to the high 71s & gold skyrocketed 56 to 2053.

AMJ (Alerian MLP Index tracking fund)

Americans picked up their spending in Nov ahead of the pivotal holiday season as inflation showed welcome signs of cooling.  Retail sales, a measure of how much consumers spent on a number of everyday goods including cars, food & gasoline, rose 0.3% in Nov, the Commerce Dept said.  That is above both the 0.1% decline projected & the revised 0.2% drop recorded in Oct.  Excluding the more volatile measurements of gasoline & autos, sales climbed 0.6% last month.  The Nov advance is not adjusted for inflation, meaning that consumers may be spending the same but getting less bang for their buck.  Consumers continued to spend at grocery stores, car dealers, health & personal stores & restaurants & bars – a bellwether of discretionary spending.  They also continued to open their wallets when online shopping, with spending at non-store retailers jumping 1% from the previous month.  However, they pulled back their spending at gas stations, electronics & appliance stores, building material & garden stores & miscellaneous store retailers.  Spending also dropped at general merchandise shops.  Sales rose in 8 of 13 retail categories last month.  A solid job market & big wage increases have helped to buoy consumer spending in recent months, despite high inflation.  However, many economists have been predicting that consumers will grow more cautious as student loan payments resume & high interest rates continue to work their way through the economy.  On top of that, more Americans are relying on their credit cards to cover necessities.  Credit card debt surged to a new record in the 3rd qtr, while delinquencies are also on the rise.  Still, the stronger-than-expected data suggests that the consumer remains strong for now, despite a number of economic headwinds.

Retail sales unexpectedly rise in November as consumers keep spending

The Federal Reserve dialed back its inflation projections, seeing its favorite gauge falling to 2.4% in 2024.  The central bank also predicted that the core personal consumption expenditures price index will decline to 2.2% by 2025 & finally reach its 2% target in 2026.  The gauge rose 3.5% in Oct on a year-over-year basis.  These new forecasts suggest a softer inflation picture in the next 2 years than that from the last update in Sep.  The Fed had foreseen the core PCE hitting 2.6% in 2024 & 2.3% in 2025.  In the post-meeting statement, the Federal Open Market Committee said inflation has “eased over the past year” while maintaining its description of prices as “elevated.”  While the public more closely watches the consumer price index as an inflation measure, the Fed prefers the core PCE reading.  The former measure primarily looks at what goods & services cost, while the latter focuses on what people actually spend, adjusting for consumer behavior when prices fluctuate.  Core CPI was at 4% in Nov while headline was at 3.1%.  Committee members also upgraded their forecast for GDP.  They now expect GDP to grow at a 2.6% annualized pace in 2023, a ½ percentage point increase from the last update in Sep.  Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook.  Projections for the unemployment rate were largely unchanged, at 3.8% in 2023 & rising to 4.1% in subsequent years.  Projections released by the Fed showed the central bank would slash rates to a median 4.6% by the end of 2024, which would be 3 qtr-point reductions from the current targeted range of 5.25%-5.50%.  The individual members of the FOMC indicate their expectations for rates in the following years in the “dot plot.”

Fed lowers inflation forecast for 2024, seeing core PCE falling to 2.4%

Treasury yields fell to their lowest levels in months as investors digested guidance issued by the Federal Reserve about the outlook for interest rates as its final policy meeting of the year concluded yesterday.  The yield on the 10-year Treasury was down by 5.6 basis points at 3.973%, breaking below the 4% mark for the first time since Aug & the 2-year Treasury yield was last 11.6 basis points lower at 4.37%.  It had fallen by as many as 25 basis points yesterday.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Treasury yields first tumbled on yesterday as the Federal Reserve's latest policy meeting ended with interest rates being left unchanged, which was in line with expectations & fresh guidance the path ahead for interest rates being issued.  The central bank indicated that 3 rate cuts could be implemented next year.  Further cuts are then expected throughout 2025 & 2026, which would put the fed funds rate in the 2-2.25% range.  The Fed also lowered its inflation forecast for next year from 2.6% to 2.4%.  Earlier in the week, the consumer price index showed that prices had increased by 3.1% on an annual basis in Nov.  “Inflation has eased from its highs, and this has come without a significant increase in unemployment. That’s very good news,” Fed Chair Jerome Powell said in a post-meeting press conference.

10-year Treasury yield drops below 4% after Fed signals rate cuts are ahead

Investors are feeling very good today.  Economic data was favorable (although some of the rise in retail sales was do to inflation) & Powell's comments were well received.  As a result Dow reached a new record high today.  The trick will be to extend this advance while many consumers are not happy with the economy.

Dow Jones Industrials