Following a frenzied surge in November, propelling the S&P by 9% (with an even more staggering 11% increase in the Nasdaq), marking the stock market's best performance since 1980, all eyes focused on Jerome Powell. The speculation was whether the Fed chair would intervene to stem the rising market tide after the record-setting ease in financial conditions, akin to nearly 4 rate cuts.
At around 11 am ET, Powell's remarks seemed balanced initially, carrying a touch of hawkishness. He cautioned against prematurely assuming a sufficient restrictive stance and refrained from speculating on future policy changes. Simultaneously, he made dovish comments, highlighting how current tight monetary policy was exerting downward pressure on economic activity and inflation. Despite sounding generally optimistic about the US economy and its trajectory towards 2% inflation without significant job losses, his statements subtly implied a green light for the market's continued upward surge.
The aftermath was a drastic reassessment of odds favoring easing, with March rate cut probabilities skyrocketing to an unprecedented 80%. This swift shift triggered a surge across assets, particularly stocks, which breached 4,600 for the first time since the July FOMC meeting, termed the "final rate hike."
However, beneath this market surge lay a clear pattern: while some stocks rose, the Nasdaq showed marginal gains, with meme stocks and highly shorted names taking the lead.
Interestingly, this surge in despised stocks resulted in a catastrophic day for hedge funds, witnessing a substantial 5% drop due to many being forced out and facing margin calls.
Examining the bond market, similar upward movements were observed, especially in 2-Year TSYs, witnessing a substantial 12bps drop to 4.56%, heading for the most significant weekly slide since the regional banking crisis in March, nearly a 40bps fall.
In contrast, the standout performer signaling renewed dollar weakness was gold, briefly surpassing its all-time high of $2,075. This record triggered a frenzy of gold call purchases, indicating optimism that rates were set to decline, with expectations now targeting $2,500 or higher for gold.
Despite these market moves, the dollar continued its downward trajectory for a third consecutive week, marking its longest decline since June and following its worst month in a year.
Moreover, as the markets react, signs of economic slowing, including downbeat ISM Manufacturing data, further highlight concerns about a potential recession, with indications that the economy is decelerating.
As attention turns to the forthcoming payrolls report, economists project a steady unemployment rate of 3.9%, potentially adding momentum to rate-cut speculation. However, the softening economic data might eventually clash with its impact on profits, likely leading to a market reassessment. While the market remains buoyant for now, history suggests a looming correction before the first rate cut, usually causing stocks to drop between 10% and 30%.
Despite this foreseeable trend, today's market activity indicates a delayed awakening to the impending market correction.