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The stock and bond markets pulled a sharp 180 this week.
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After a prolonged sell-off, both recovered on renewed prospects for a Fed rate cut.
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The trifecta of events suggests the Fed may be more aggressive than previously thought.
Stocks and bonds experienced a major turnaround this week thanks to a perfect storm of factors that recalibrated investors’ expectations for rate cuts in the coming year.
The S&P 500 it is on track to rise more than 3% in five days, which would be its best weekly gain since Donald Trump’s election victory in November. The Dow and tech-rich Nasdaq are also headed for weekly gains of 4% and 2.5%.
The upward movement follows erasing post-election gains for the S&P 500which is down more than 5% from its highs in December.
Meanwhile, bonds also rallied, s 10-year US Treasury the yield fell by 14 basis points this week. (Bond prices and yields move inversely.) Before the change, yields had risen more than 100 basis points since mid-September.
The tandem reversals represent a reset of the rate outlook as investors eye more monetary easing from the Federal Reserve than was announced a week ago. Last week, surprisingly strong December business report has had the opposite effect on markets, and some on Wall Street assume it has The Fed’s next move could be rates walking.
The situation has been fueled by a triple whammy of events this week that has made investors more prone to the worst case scenario.
The first came on Wednesday, when traders received a colder than expected December inflation report. Headline inflation was in line with expectations, but core inflation — which excludes volatile food and energy prices — rose 3.2% from a year ago, slightly below the 3.3% expected by economists.
Traders have adjusted their outlook for Fed rate cut in the coming year, and the yield on 10-year government bonds fell by as much as 14 basis points on Wednesday.
“Core inflation is not accelerating, and that’s the story,” Jamie Cox, managing partner at Harris Financial Group, said after the report. “The market may have had their hair on end at inflation running away again, but the data does not support that conclusion. What we are seeing is the typical ebb and flow of data as inflation is squeezed out of the system,”
Others argued that the data should allay any fears that the Fed could raise rates again this year amid a hot economy and higher inflation as a result of the new administration’s policies.
The good news continued on Thursday with the announcement retail sales data that missed estimates and slowed from the previous month. Sales rose 0.4% year-on-year in December, which was lower than the consensus expectation of 0.6%.
