The Dividend Cafe - The DC Today - Wednesday, December 13, 2023

Episode Date: December 13, 2023

Today's Post -https://bahnsen.co/46RNNmw This may have been the least anticipated Fed Day in nearly two years, with the futures market serving up a 100% chance of no rate change ever since the last Fed meeting. That said, the Fed chair talking after a rate announcement always has the possibility of moving markets. Today, he moved markets. That he didn’t even remotely push back against market expectations for rate cuts next year was a surprise, but the dot plot actually showing three rate cuts in 2024 was a huge surprise. Now, I have been saying it for months, and fed futures have been forecasting it, so maybe this market response seems overdone – but for Jay Powell to just say it? Today was like reading a future history book. I think it is important to note that the Fed Funds Futures are currently pricing in a 100% chance of a 100 basis point reduction (1%) in the Fed Funds Rate by this time next year. There is a 24% chance of it being down 1.25%, a 37% chance of it being down 1.50%, and a 26% chance of it being down 1.75% – all by next year. The most “hawkish” expectation is a 100 basis point cut. All stock market indexes were up the SAME. And I am pretty much sure this was the biggest bond rally of my career in a single day, as the 2-year yield dropped THIRTY BASIS POINTS and the 10-year dropped EIGHTEEN BASIS POINTS. Ay yi yi. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Hello and welcome to the Wednesday edition of DC Today, Fed Day, back in the New York studio office. Just got back a couple hours ago, flying back from Michigan and flew back in time for the Fed press conference. And I am telling you today we'll be in the history books. The history books I refer to are not necessarily the ones your kids and grandkids will read in fourth grade,

where they talk about Christopher Columbus discovering America, but they will be in the financial history books because I have never seen a press conference like this from the Fed. And I am still, as I'm recording, as I was typing the DC Today just moments ago in a complete state of shock about what I have seen, the Fed more or less today told you, yeah, the futures are right. We're going to be cutting. Now, you could say, David, this isn't news. You've been telling us for weeks that you think they're going to cut in 24, that you

don't think they're going to be tightening or hawkish in an election year, and that the futures market has already been predicting it. And that's all true. But I, in between meetings and speeches in Michigan was sitting in my hotel room listening to Bloomberg, I think starting at like three something in the morning. And then for hours upon hours, it felt like two days of guest after guest saying, the one thing we know is that J-PAL will push back against the narrative that the futures market is saying. It doesn't mean that the futures market is wrong.

They still will probably end up cutting. But he's not going to want to let that expectation be priced in. He's not going to want to lose financial tightening. And we think he's going to pull back on it. He not only didn't pull back on it. He not only didn't pull back on it, he leaned completely into it and said the Fed's own dot plot now shows three rate cuts next year. So the markets went ballistic. The Dow closed up over 500 points, 512. And then get this, to give you an idea of how synchronized all of this action was,

maybe a little bit of short covering. I sure hope nobody was short going into this. The Dow was up 1.4%, the S&P 1.37, the NASDAQ 1.38. You tell me another day that those three indexes were that closely correlated virtually to the basis point in terms of performance. And then we're not even to the real story yet, which was the bond market. The three-year and five-year, not too far behind, 25 and 28, respectively. Massive rally in the bond market from the 2 to the 10 term. Probably the biggest bond rally in any given day of my career. I guess I could look maybe at 9-11, the first day the market opened after 9-11. There might be some other just abhorrent bad market days that the bond market rallied more than this, but I don't know. Something absolutely historical. Utilities were up 3.72%. That's the highest performer of the day.

Real estate was up 3.58%. The worst performer was communication services, and that was up 65 basis points. Oil didn't move much. It was up a little over 1%, staying right there around $70. But again, the whole issue today was the Fed, obviously. Bonds, stocks, cats and dogs, all the things. Big upside. Maybe the market gives some of it back tomorrow. The Dow closing at an all-time high. S&P and NASDAQ are not quite there, but the NASDAQ has got a ways to go. The S&P has got a couple percent, two or three percent to go. The

Dow is there. So just surreal, really surreal. And I don't know exactly how we kind of close out the next couple of weeks. You're now past CPI. You're past the Fed. You're past earnings season. You know, maybe some geopolitical event stuff and maybe just profit taking. I don't know. But we're late in the year and this was the news.

And now the Fed really kind of signaling that they do intend to be massively reversing course next year. He did rhetorically anyways hold up the notion that they're going to stick to quantitative tightening in 2024. I have a lot more work to do on that front. I'm not sure I believe them there. And I'll be writing about that in the annual white paper that I do every year, our year behind, year ahead retrospective and forecast. And I'm going to be talking about the aspect of the Fed's balance sheet that I think will be a big story in 2024. For now, though, the Fed hasn't gotten any reason to say that they need to be putting

liquidity back in the financial system. They've been taking liquidity out and they don't mind the way things are going. And so he at least can afford to keep talking that way about quantitative tightening. But it's a little bit of a divergent message to say, yeah, we see ourselves cutting rates. And again, the futures market is saying, listen to this, a 100% chance of a 100 basis point, 1% cut by next year, this time. And then it's higher than that chance for one and a quarter. That's a 24% chance. One and a half is a 37% chance. And one and three quarters, almost two percentage points lower by this time next year is a 26% chance in the futures market. So bare minimum 100 up to possibly 175. I think the full 200 basis points is only

a few percentage points as far as the way futures are timing it or pricing it. Obviously, those things can be wrong and can be adjusted. That's why they are in futures contracts and have a market and have a time value. But my point is, it's tough to see them continuing to be tight on the balance sheet if they're getting so loose with the interest rate. So that's another subject we'll have to address. Like I said, I'll talk about in the white paper. I'm going to let you go. Tomorrow, Brian Saitel will bring you DC Today as I'll be here in New York and have just too many meetings to do it myself. But reach out with any questions. That's all I have. Thanks for listening. Thanks for watching. Thanks for reading the VC Today.

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