December E-Mini S&P 500 futures (ESZ23) and Dec Nasdaq 100 E-Mini futures (NQZ23) are both at 23-month highs, up +0.59% and +0.48%, respectively.
Stock index futures are building on Wednesday’s gains following the Federal Reserve’s indication of concluding its tightening campaign. The Fed also hinted at a shift towards reversing rate hikes, projecting three 25 basis points rate cuts in the coming year. Fed Chair Powell’s lack of resistance to market expectations of 2024 rate cuts, as opposed to the previous possibility of another rate hike, has further fueled positive sentiment.
European stocks’ upward trajectory is contributing to the positive momentum in U.S. stocks. Expectations of looser policies from the European Central Bank (ECB) and the Bank of England (BOE) have driven government bond yields lower, propelling equities. The Euro Stoxx 50 reached a 22-year high today after both central banks maintained unchanged interest rates.
Despite stronger-than-expected U.S. weekly jobless claims and November retail sales, the bullish sentiment in asset markets persists.
U.S. weekly initial unemployment claims unexpectedly fell by -19,000 to an 8-week low of 202,000, demonstrating a more robust labor market than the anticipated 220,000.
November retail sales in the U.S. unexpectedly rose by +0.3% month-over-month, surpassing expectations of a -0.1% decline. Retail sales excluding autos also increased by +0.2%, defying expectations of a -0.1% month-over-month decrease.
The November import price index excluding petroleum also exceeded expectations by rising +0.2% month-over-month, contrasting with projections of a -0.2% decline.
Market expectations for a -25 basis points rate hike are at 18% for the January 30-31 meeting and 97% for the subsequent March 19-20 meeting.
Government bond yields in the U.S. and Europe are lower today. The 10-year T-note yield reached a 4-1/2 month low of 3.930%, down -6.6 basis points at 3.951%. The 10-year German bund yield fell to an 8-1/2 month low of 2.029%, down -7.2 basis points at 2.101%. The 10-year UK gilt yield dropped to a 7-1/4 month low of 3.664%, down -9.0 basis points at 3.740%.
Overseas stock markets are displaying mixed results. The Euro Stoxx 50 is up +0.75%, China’s Shanghai Composite Index closed down -0.33%, and Japan’s Nikkei Stock Index closed down -0.73%.
The Euro Stoxx 50 is moderately higher today, reaching a 22-year high. The Fed’s indication of rate hikes next year has created a risk-on sentiment in European equity markets. Real estate stocks, sensitive to interest rates, are leading the gains. Additionally, optimism about potential easier policies from the ECB and BOE has lowered government bond yields, supporting stocks. Both the 10-year German bund yield and the 10-year UK gilt yield reached multi-month lows. European stocks maintained their gains post the ECB and BOE’s decisions to keep interest rates unchanged.
As expected, the ECB maintained its deposit rate at 4.00% and announced an accelerated balance-sheet reduction by allowing some bonds maturing from its pandemic emergency purchase program (PEPP) to roll off before the end of 2023. The ECB plans to reduce its PEPP portfolio by an average of 7.5 billion euros per month in the second half of 2024 and aims to cease reinvestment under PEPP at the end of 2024. The ECB revised its 2023 Eurozone GDP estimate to 0.6% and cut its 2023 core CPI estimate to 5.0%.
The BOE voted 6-3 to keep its benchmark rate at 5.25%, stating that “restrictive” policy will likely be necessary for an extended period. Three policymakers advocated for a +25 basis points rate hike, with BOE Governor Bailey indicating that there is “still some way to go” on inflation. Swaps tied to ECB meeting dates suggest a 72% chance of a -25 basis points rate reduction at the March 7 meeting.
China’s Shanghai Composite index closed moderately lower today, influenced by economic concerns. Friday’s economic reports for November industrial production and property investment are expected to signal a slowdown from October. Deflationary worries may impact retail sales growth, with the ongoing property slump likely to affect investment. Weakness in these reports could prompt calls for additional government stimulus. The People’s Bank of China (PBOC) is anticipated to maintain its one-year policy loan rate at 2.5% on Friday. Tourism-related stocks rose after the government announced a 3-year plan to promote inbound tourism.
Japan’s Nikkei Stock Index closed moderately lower as the yen surged to a 4-1/2 month high against the dollar after the Fed signaled the end of interest rate hikes. Japanese exporter stocks were undercut by the stronger yen. Japanese bank stocks retreated due to falling bond yields, diminishing expectations for higher profitability. Political turmoil, with Prime Minister Kishida announcing a cabinet reshuffle amid a deepening political funding scandal, contributed to the decline in Japanese stocks. However, October core machine orders unexpectedly rose by +0.7% month-over-month, surpassing expectations of a -0.4% decline. October industrial production was also revised higher by +0.3 to +1.3% month-over-month.
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