Weekly Wisdom – December 7, 2023

By Hightower Great Lakes on December 7, 2023

The Word Is “Cut”

Not all Fed speak is created the same. Salivating at the prospect of a Fed speaker acknowledging cuts are on the horizon, the market got what some might consider an early Christmas present.

Federal Reserve Governor Christopher Waller commented last week that he is becoming, “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to two percent.”[1]

The statement comes as core personal consumption expenditures (PCE) have advanced only 2.3% on an annualized basis since June, a statistic which many believe puts the Fed on track to cut rates in the first half of 2024. Since the remark, the regularly cited 2-year Treasury yield has dropped 30 bps and has returned to levels last seen in June.

However, not all of the economic data recently released offers a “pedal to the metal” mentality. Instead, the data appears to be somewhat of a “goldilocks scenario” for the Fed, which is seeking to slow the economy and cool inflation. In November, factory orders experienced the largest sequential decline since April 2020, and durable goods fell the third most since 2020.

Further, the labor market continues to unwind, displayed in the JOLTS report, (8733K | 9300k expect | 9533k last) which came in below every economist’s estimate. The economic data points neither towards a cyclical downturn nor robust growth, but it does indicate falling inflation and opportunity for soft landing.

We do not expect that the economy can continue to grow at 5.2% y/y, as we experienced in Q3. The Atlanta Fed’s most recent Q4 GDP estimate revealed a 1.3% figure. Areas of strength include the Chicago purchasing manufacturer’s index (PMI) – a figure highly correlated to the ISM manufacturing PMI – which blew past consensus estimates (55.8 | 46.0 expect | 44.0 last).

The S&P Global U.S. Services PMI remains at expansionary levels (50.8 | 50.8 expect | 50.8 last), and ISM Services new orders remains at the highest level since August (55.5 | 54.9 expect | 55.5 last). These data points signal growth is ahead.

Chart 1: Chicago PMI vs. ISM PMI

When Will We See Cuts?

As mentioned previously, we are in the camp that all the data taken together points to cuts in the first half of 2024; data remains our best friend. Annualized rates of monthly increases are helpful gauges of what the Fed might do. The market is currently pricing a 14% chance in January and a 75% chance in March of at least one 25 bps rate cut. This is reflected in yield movements.

Chart 2: U.S. 2-Year Treasury Yield

At its peak, just six weeks ago, the 2-year yield had risen 80 bps year-to-date. Since, it has fallen 64 bps, and stands only 16 bps above where it started out the year. The 10-year yield has followed a similar trajectory seen below. The 10-year yield is an especially important gauge for corporate debt issuance, and the health of balance sheets in turn.

A continued move lower would put corporations back in the driver’s seat for 2024, offering the ability to issue more debt to drive growth. Of note, the S&P 500 (SPX) quarterly interest rate as a percentage of sales averaged 2.0% from 2008-2021.[2] During that same period, the 10-year yield averaged 2.37%.[3]

Chart 3: U.S. 10-Year Treasury Yield

Is Crypto Back?

It would be a disservice to ignore the derivative moves of the recent treasury rally. Due to the increasing likelihood that the Fed will cut interest rates, two inflation-linked assets, gold and Bitcoin, have risen 13% and 64% respectively from their October lows as of December 5.

Gold reached an all-time high and Bitcoin continues soaring to levels not seen since April of 2022.[4] The underlying thesis for the appreciation is the non-interest-bearing nature of the assets.

Chart 4: U.S. 2-Year Yield vs. Price of Gold & Bitcoin

Another driver of price is the potential for a spot Bitcoin ETF. The original buzz around a potential spot Bitcoin ETF started over the summer of 2023, but has only intensified recently. Many companies await SEC approval to list a spot Bitcoin ETF on major exchanges.

Most recently, a BlackRock (BLK) filing revealed that the company received $100,000 in funding from an unknown investor for the company’s spot Bitcoin ETF.

Stemming from the SEC’s deadlines on responding to these sorts of proposals, consensus calls for some or all of these potential ETFs to be approved early in 2024: Imagine telling someone that one year ago today.[5] The acceptance of crypto could turn out to be the sentiment indicator that economists have been missing the whole time…

Click here to read last week’s Weekly Wisdom (11/29).

Disclosures

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: CNBC. As of November 28, 2023.

[2] Source: Strategas. As of November 22, 2023.

[3] Source: Bloomberg. As of December 5, 2023.

[4] Source: MarketWatch. As of December 4, 2023.

[5] Source: CNBC. As of December 5, 2023.