A lot of the drama has come out of the financial markets as we get past the Presidential election, Fed rate cuts, inflation data, jobs data and corporate earnings.
What will be the themes for 2025? Inflation seems to be fading from the forefront as the Fed’s policy changes will need time to marinate. Also, the Fed can claim some success (for a problem they helped create) as the inflation numbers this week (CPI &PPI) came in as expected and nearer their policy goal of 2%.
However, progress is stalling and a solution for further progress will need to come from somewhere else like private sector growth or a disciplined approach to fiscal spending. Fed Chair Powell seems to recognize this and threw cold water that several rate cuts are in store for 2025 on Thursday as he stated the FOMC is in no rush to cut interest. A weakening of the labor market could change that stance but we will have to wait and see how November hiring goes first.
The Yield Curve
How many rate cuts is the market pricing in? If we look at the blue line of the yield curve below, you can see it has flattened which tells me that bond traders are seeing one more 25bps rate cut within the next three months. In the lower left hand corner, I have an indicator of what the yield differentials are implying for Fed action, FYI.
What about the 10Yr Treasury Bond?
Longer tenor bonds don’t trade in tandem with Fed policy and consider expectations of growth and inflation over the next several years. As you can see in the chart below, the 10Yr yield peaked (green ‘1’) last year and is now in a corrective pattern. Despite the most recent rise in 10Yr yields, I think it may be short-lived. So far, this corrective pattern over the last year looks a bit small and shallow and could easily last longer with yields eventually dropping below the most recent low of 3.5%.
The S&P 500 Chart
We got some action in the stock market over the past two weeks. The trading after the election caused the S&P to gap higher which is rare to see on a daily chart. However, met resistance at $600 which is a confluence of trend line resistance (white lines) and the 161.8% extension of the July high and August low.
As a reminder, a 161.8% extension is like an echo of a notable high/low and not a surprise we saw prices retreat from this level in this week’s trading. How low do we go? It looks like there was some evidence of buying in the final hour of Friday so a bounce is likely coming early next week. As long as the new trend channel holds, we should see stocks continue up and to the right as we approach 2025.
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President, Kisco Capital
