The major market averages posted their sixth straight week of gains after a November jobs report struck the right mix of strength and weakness to keep the soft landing on track. Added economy 199,000 jobs, which was more than expected, but that was largely due to the 47,000 auto workers on strike and Hollywood personnel returning to work. The gradual decline in monthly wages remains unaffected. The unemployment rate fell to 3.7%, yet wage growth continues to moderate with average hourly earnings growth holding steady at 4%. Job openings continue to fall to a first level last March 2021, further easing wage pressures. That was good news for investors, but it didn’t end there.
Consumer confidence is finally starting to rise from the ground floor, just like that of the University of Michigan consumer sentiment index rose sharply in early December to 69.4. The reason is that expectations for inflation in the coming year fell from 4.5% to 3.1%, which was the biggest drop since 2001. The long-term outlook for inflation also fell from 3.2% to 2.8%. These are positive rates of change that risk asset prices have been significantly discounted over the past few weeks.
Perhaps the most important factor that has lifted consumer sentiment has been the rapid decline in gasoline prices to a new low for the year. This couldn’t come at a better time, as the holiday shopping season is in full swing.
The fight against inflation is largely over, if not won, yet some strategists are still talking about “sticky” inflation. The latest CPI report found that the base rate less housing costs is already at the Fed’s target of 2%. If anything is sticky, it’s house prices and rents, but we know that rent inflation will come down significantly based on the new rates that are working themselves into the 12-month number. House price increases have also stalled, thanks to rising mortgage rates, so there should be no worries about housing costs heading up.
Recognizing these various positive rates of change explains the dramatic improvement in breadth that has fueled the six-week rally in stocks, and I think it sets the stage for a very good start to the new year. However, the rally has been too long, as I’ve discussed over the past few days, and I’m concerned that we’ve moved up too quickly. I’m also concerned that the Fed is becoming increasingly uncomfortable with easing monetary conditions before it can prove it has hit its inflation target. Therefore, since Chairman Powell was ineffective in subduing the rally a week ago during his latest speaking engagement, I expect the Fed to make another attempt to dampen enthusiasm for risk assets when it releases its updated Summary of Economic Projections. .
The latest, which you can see below, was released on September 20. A lot has changed in the last three months. However, I see no reason for the Fed to adjust its estimates for real GDP or the unemployment rate at the end of 2024. It should lower its projection for PCE and core PCE from what is now 2.5% and 2.6% respectively. %. , given the progress made so far. If so, then it would make sense to also lower its projection of where the Fed funds rate will be at the end of 2024. In September, the committee’s “full stop” saw the rate at 5.1%.
Investor consensus sees short-term rates closer to 4.1%, and that’s where the Fed could purposefully depress to limit growth that is rapidly easing financial conditions. If they cut the projection back to June’s 4.6% level, I could see long-term rates rising and stocks falling, but I think both would be short-term counter-trend moves that would help resolve the overbought condition in stocks. and bonds. before the end of the year. The Fed may rain on the rally in the coming days, but this should be an opportunity for money to work for the new year.