1. Markets Take a Breather After Strong Run
The S&P 500 ended its three-week winning streak with a modest decline, while the Dow Jones Industrial Average fell nearly 2%. The tech-heavy NASDAQ managed to eke out a small gain, buoyed by strong performance in communication services stocks. Despite this temporary pause, the broader market remains on track for an exceptional year, with the S&P 500's total return approaching 29% year-to-date.
Key Takeaway: Markets are showing signs of consolidation after a remarkable year-end rally.
2. Inflation Concerns Resurface
November's Consumer Price Index came in at 2.7%, marking the second consecutive monthly increase from September's 2.4% reading. The Cleveland Fed's estimate suggests December could see further increases, potentially reaching 2.86%. Core PCE, the Federal Reserve's preferred inflation gauge, has also ticked up to 2.8% - its highest level since April.
Key Takeaway: The path to the Fed's 2% inflation target is proving bumpier than anticipated.
3. Bond Market Signals Caution
Treasury yields reversed their recent downward trend, with the 10-year note jumping to 4.40% from 4.15% the previous week. This sharp move reflects growing concerns about persistent inflation and questions about the pace of potential rate cuts. The bond market is now pricing in a January pause and only 50 basis points of rate cuts for 2025.
Key Takeaway: Bond investors are reassessing their optimistic rate cut expectations.
4. European Central Banks Take Action
The European Central Bank implemented its fourth rate cut of the year, lowering rates by 25 basis points. Meanwhile, the Swiss National Bank surprised markets with a larger 50 basis point reduction. The ECB simultaneously downgraded its growth forecast, projecting just 0.7% growth for 2024 and 1.1% for 2025.
Key Takeaway: European monetary policy continues to diverge from U.S. trajectory.
5. Growth vs. Value Gap Widens
Large-cap growth stocks continued their dominance over value counterparts, extending a two-week performance gap to nearly 8 percentage points. This trend has characterized much of 2024, reflecting strong performance in technology and communication services sectors.
Key Takeaway: The market's preference for growth stocks remains pronounced.
6. Corporate Buybacks Show Mixed Signals
S&P 500 companies increased their buyback spending to $918 billion in the trailing twelve months through September 2024, representing a 17% year-over-year increase. However, third-quarter spending declined 4% compared to the first quarter, suggesting some companies may be becoming more conservative with capital allocation.
Key Takeaway: Companies maintain strong buyback activity but show signs of increased caution.
7. Fed Continues Easing Cycle
The Federal Reserve implemented its third consecutive rate cut yesterday, lowering rates by 25 basis points to 4.25-4.50%. This marks 100 basis points in total rate cuts since September, despite extremely easy financial conditions and warming inflation data. The Fed's updated December projections now align more closely with market expectations, indicating higher inflation forecasts for 2025 (2.5% PCE) and fewer rate cuts (50 basis points) than previously projected.
Key Takeaway: The Fed maintains its easing stance but signals a more cautious approach for 2025.
8. Looking Ahead: Key Economic Indicators
The coming week brings crucial economic data including retail sales, housing starts, third-quarter GDP revision, and the Personal Consumption Expenditures Price Index. These releases will provide important context for both monetary policy decisions and market direction heading into 2025.
Next week's focus will be on the PCE Price Index release and housing market indicators as markets prepare for the final trading days of 2024.
