The AM Call: Too Fast, Too Furious?

• Markets rallied last week, as hopes of a Fed pivot drove optimism across risk assets. A raft of Fed officials spoke last week ahead of the press blackout period before their December meeting. On Friday, Fed Chair Powell stated “we are prepared to tighten policy further if it becomes appropriate to do so,” which was interpreted by markets as dovish—emphasis on the “if”. Both equities and fixed income rallied last week due to risk-on appetite. Gold and bitcoin also rose.
• We are of the view that markets may now be too rosy in pricing in multiple Fed rate cuts. Fed funds futures now imply -125 bps of easing by YE24, with the first cut in March. Still, after a brutal 2022 and a somewhat rocky 2023, we’ll take it.
• The Bloomberg Aggregate index rose 4.5% in November, which was the best single month performance since 1985. The 10Y U.S. Treasury yield is now down to 4.25% after peaking close 5% in October, while the 2Y fell from 5.22% to 4.6%.
• The positive momentum was supported by October PCE figures, which came in better than expected. As a reminder, PCE is the Fed’s preferred inflation metric. Core PCE rose 0.2% MoM and 3.5% YoY, compared to 0.3% and 3.7% in September.

• Other macro data included October personal income and spending. Personal income and personal spending rose by 0.2% for October, in-line with estimates and lower than in September.

• Equities rose for the week. In earnings news, Zscaler (ZS), Workday (WDAY), Snowflake (SNOW), Salesforce (CRM), Crowdstrike (CRWD) and Okta (OKTA) were the positive highlights, while Dollar General (DG), Marvell Technology (MRVL) and Dell (DELL) were the biggest disappointments. Tame results were provided by Intuit (INTU), Splunk (SPLK), HP Enterprises (HPE), Synopsis (SNPS) and Pure Storage (PSTG).
• In corporate news, Tesla (TSLA) announced it will begin deliveries of the much anticipated Cybertruck with a base price of $61,000, higher than the initially planned $40,000. Apple (APPL) will exit its card partnership with Goldman Sachs (GS). General Motors (GM) announced budget cuts that the company said will fully nullify the negative impact of the recently signed labor agreement with UAW while increasing dividends and initiating a stock buyback program of $10 bn. In Healthcare News, press reports indicated that Cigna (CI) and Humana (HUM) are studying a possible merger creating a healthcare juggernaut.

The Week Ahead

• For the week ahead, the November employment data will drive the narrative, as markets look for clues as to whether the economy is slowing sufficiently to allow the Fed to cut rates aggressively in 2024. The JOLTS job survey is first up, with expectations for 9.3 million job openings in October, down from 9.55 million on September.

• On Friday, we get non-farm payrolls for November with estimates calling for 180,000 in new jobs. The unemployment rate is estimated to be steady at 3.9%, and average hourly earnings are estimated to be up 4.0% YoY (vs. 4.1% prior).

• Earnings season is pretty much over, but we get a few companies still reporting. Veeva Systems (VEEV), Docusign (DOCU), Broadcom (AVGO), VMWare (VMW), C3ai (AI), Chewy (CHWY), MongoDB (MDB), AutoZone (AZO) and Dollar General (DG) are among companies reporting Q3 this week.

Market Summary – Returns and Yields

Definitions, sources, and disclaimers

Definitions:

• Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
• GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
• The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
• Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
• The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
• The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
• The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
• Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
• Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
• The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
• The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.  

Important Disclosures:

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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