We opined on Friday that bond and stock traders appeared

We opined on Friday that bond and stock traders appeared to listen rather selectively to Chairman Powell’s address.  This morning’s reaction, where those markets have largely retraced Friday’s moves, seems more in line with the full tone of those comments.  Our perspective was:

In the market’s current mindset, the acknowledgment of a restrictive policy is a good thing.  Never mind that it is hardly restricting investment in stocks and now bonds, and that the most recent reading of third-quarter GDP was 5.2%, the prevailing sentiment is that the Fed has a predilection for moving rates back to a neutral, if not accommodative stance.  Thus, rate cuts.

The full text of the speech offers little else indicating an immediate move toward rate cuts.  He led with the now-standard boilerplate about being prepared to tighten further, even if no one seems to take it seriously.  But Powell reiterated more than once that 3%, or even 2.5%, is not 2%

We also acknowledged that the stock market’s reaction could have been abetted by seasonal factors:

While it was entirely possible that the move higher in equities was inevitable, considering that today is both the first of the month and a Friday (we’ve discussed options traders’ ability, if not propensity, to shove markets higher on Fridays), the sharp reversal in bond yields seems more linked to Powell’s speech.  Whether it was actual enthusiasm about Powell’s speech or simply a relief that it wasn’t bad news, we see yields about 6-8 basis points lower after being up by about 3-4bp earlier this morning.

Stocks rose throughout the afternoon as bonds continued their advance.  Indeed, Fed Funds futures went from pricing in a 53% chance of a rate cut by March to 75%, and the expectation for December 2024 went from 4.19% to 3.99%.  Again, this was when there was no explicit indication that rate cuts were planned for the near future.  This morning we see about half of those expectations retraced, with March showing a 65% chance of a cut and December priced at 4.10%.  Treasury note yields gave back the bulk of their gains as well, with the 2-year yield going from 4.68% on Thursday to 4.54% on Friday, to 4.65% just before midday.  The 10-year yield went from 4.33% to 4.2% to 4.29% over that same period.  Meanwhile, we see the S&P 500 (SPX) retracing roughly all of Friday’s gains, with the NASDAQ 100 (NDX) well below even Thursday’s lows: