Wall Street holds back on big bets before consumer report

Stocks, bonds and the dollar saw small moves, with traders refraining from big bets ahead of key economic data and meetings from major central banks that will test market optimism about rate cuts next year.

Wall Street is about to get a sense on whether the disinflation trend is continuing, with Tuesday’s consumer price index.

The report will be released a day before the last scheduled Federal Reserve decision of 2023, with officials widely expected to hold rates and announce their Summary of Economic Projections.

The question is whether the Fed will try to temper policy easing expectations after investors aggressive dovish repricing.

“A lackluster start to the week, but there’s so much to come over the next few days – which could determine how markets end the year and start 2024,” said Craig Erlam at Oanda.

“The Fed decision on Wednesday is unlikely to be controversial, but the forecasts, dot plot and press conference that accompany it may well be.”

The S&P 500 held above 4,600, while the Nasdaq 100 outperformed amid a rally in chipmakers like Intel Corp. and Broadcom Inc.

Treasury 10-year yields and the dollar barely budged. Bitcoin sank below $41,000, following a surge of more than 150% this year.

A survey conducted by 22V Research shows 46% of the investors polled think the market reaction to CPI will be mixed or negligible, 28% are betting on a “risk-off” event and only 26% see a “risk-on” response.

To Greg Marcus at UBS Private Wealth Management, the recent strength in stocks is largely based on expectations of a soft landing and rates coming down in 2024.

The Fed will likely cut rates next year, but that may be because the economy is slowing, in which case markets would look different than they do now, Marcus added.

“While inflation data has shown signs of easing, the resiliency of the labor market makes it difficult for the Fed to cut rates as the economy weakens,” said Megan Horneman at Verdence Capital Advisors. “We believe that investors are too optimistic on this view.”

U.S. consumers’ near-term inflation expectations dropped in November to the lowest level since April 2021, according to a Fed Bank of New York survey.

Growing speculation that the Fed is done hiking rates and will start easing by mid-2024 fueled a plunge in Treasury yields in November, while rekindling investors’ risk appetite.

To Matthew Weller at Forex.com and City Index, some investors might expect the potential for some volatility around the CPI data, but with the Fed seemingly committed to leaving rates higher for longer, we may not see as much movement as we have around past reports.

“Ultimately, regardless of what this week’s U.S. inflation report shows, Jerome Powell and company will want to see at least a few more months of job and inflation data before tweaking the current monetary policy settings,” he noted.

As the market adjusts to the Fed potentially holding rates higher for longer, Alexandra Wilson-Elizondo at Goldman Sachs Asset Management, said that any pullback under that premise would be deemed a head fake, with prices moving in one direction before quickly reversing.

“If the market trades down, it is a good opportunity to rebalance or buy the dip” she noted. “It’s too early to be underweighting the risk premium of equities.”

The S&P 500 will hit a record high in 2024 as the U.S. avoids sinking into a recession, although a weaker consumer will mean the index gains less than this year’s 20% surge, according to Bloomberg’s latest Markets Live Pulse survey.

A median of 518 respondents expect the S&P 500 to climb to 4,808 points next year – topping its previous closing peak of 4,797 hit in January 2022 – and the 10-year Treasury yield to drop to 3.8% from this year’s high of 5%.

More than two thirds of respondents indicated they don’t see a hard economic landing as the top risk to markets and majority expects Fed rate cuts to begin before July.

One of Wall Street’s biggest bulls estimates that the S&P 500 will hit 5,200 points next year to set a fresh record.

“We look for 2024 to be a year of transition as markets navigate what we expect will be the Fed’s pivot from a restrictive monetary policy setting to an easier stance,” Oppenheimer Asset Management chief strategist John Stoltzfus said.

The S&P 500 is likely to hit a record high next year, underpinned by “consistent” sector-level earnings growth and a broadening of the rally beyond mega cap tech stocks, according to Citigroup Inc.’s Scott Chronert, who expects the gauge to finish 2024 around 5,100 points.

To David Kostin at Goldman Sachs Group Inc., U.S. growth stocks will outperform value peers next year as economic growth remains modest and rates do not rise much further.

U.S. company earnings are likely to weaken in the fourth quarter before a rebound in 2024, Morgan Stanley’s Michael Wilson said.

The strategist highlights a “steep downward revision” to consensus fourth-quarter estimates, and adds that he is less optimistic than other strategists about the magnitude of margin expansion next year.

Elsewhere, natural gas futures plunged the most in nine months as forecasts shifted warmer for the U.S. into early next year, signaling lackluster demand as production hits fresh records.

Oil steadied after concerns that supplies are overtaking demand triggered the longest weekly losing streak in five years.

Bank of Japan officials see little need to rush into scrapping the world’s last negative interest rate this month as they have yet to see enough evidence of wage growth that would support sustainable inflation, according to people familiar with the matter.