Don't Fight The Fed

This issue is a follow-up to the January 8 "2023 In Review and 2024 Outlook" article on the market debate: Economic Recession vs. Soft Landing in 2024.

The Market Says Soft Landing

The market is very optimistic; Soft Landing has almost become the consensus call to begin 2024. It expects six 25 basis points rate cuts in 2024 starting as early as March, a total of 1.5% for the year (6 x 0.25%). The CME FedWatch Tool placed the odds of a March rate cut last week at 81%. Some are even suggesting that it is surprising that the market is not pricing in an even steeper rate cut. On Friday, the Dow Jones jumped 395 points as the S&P 500 and Nasdaq hit record highs.

Consumer Sentiment is High

The University of Michigan Consumer Sentiment Index was released last Friday.The expected number was 70.1% but came out high at 78.8%. The number was up 13%, the highest since July 2021. There was a 29% cumulative climb in the last two months, the highest increase since 1991. The numbers suggest consumers' fear of inflation is softening, and the consumers continue to spend with confidence. Year-ahead inflation expectation is down to 2.9%, the lowest since December 2020. The December retail sales are better than expected, and the fourth-quarter Gross Domestic Product will be around 2%. Things are not looking so bad.

Federal Reserve Does Not Agree

While the market is very optimistic, the Federal Reserve has other ideas. At the December 12-13 Federal Reserve Meeting, the Federal Reserve signaled that the central bank would cut rates only three times in 2024. The policymakers took pains to dampen the market's expectations. Last Tuesday, Fed Governor Christopher Waller said rate cuts would be "methodically and carefully" done. On Wednesday, Atlanta Fed President Raphael Bostic said that rate cuts might start in the third quarter. On Friday afternoon, San Francisco Fed President Mary Daly said policymakers must be "patient" about rate cuts. All are voting members of the 2024 Federal Open Market Committee (FOMC). The CME FedWatch Tool has the odds of a March rate cut last Friday falling to just 47.2%.

Bond Market vs. Stock Market

The Fed Governors' comments and strong economic have pushed the market rates. The 10-year Treasury yields have been increasing, with a low of 3.785% on December 27, rising to 4.15%. The 10-year yield has hit its 50-day line resistance on Friday.

The stock market may shrug off rising Treasury yields for some time, as it has shown in recent years. But if Treasury yields keep rising, the Stock market will have to decline. Let’s not forget the old Wall Street mantra, "Don't Fight The Fed."