The stock market remained steady following a strong rally, as traders anticipate that the Federal Reserve will begin cutting interest rates next year. However, they also expect policymakers to counteract recent financial condition easing. The S&P 500 inched higher after experiencing its best week of the year. The market rebound is attributed to oversold technical conditions and positioning. Despite the positive sentiment, the reversal of Treasury movements put pressure on equities, with 10-year yields increasing by seven basis points to 4.64%. The bond market was also affected by a significant number of new corporate bond sales and upcoming auctions. Moreover, a series of speeches by Fed officials, including Chair Jerome Powell, could provide clarity on the rate-cut timeline, as well as potential adjustments to the current easing of financial conditions.
Traders have already priced in more than 100 basis points of rate cuts by the end of 2024, and they have moved up their predictions for the first cut to June 2023. Andrew Brenner, head of international fixed-income at NatAlliance Securities, believes that the Fed will resist market expectations of multiple rate cuts in 2023. He suggests that Powell will push back against this forecast to maintain flexibility. Wall Street is closely following the Senior Loan Officer Opinion Survey (SLOOS), scheduled to be released later today, which could shed light on bank lending trends. Traders are interested in how Powell’s recent comment on the expected impact of past rate hikes will translate into potential tightening of credit by banks in the coming months.
The S&P 500, currently at around 4,365, faces a critical level of 4,355, representing a 50% retracement from the decline experienced between July and October. Should the index hold above this level, the next key level to monitor is 4,400. The success in breaking this level will determine whether the recent market rebound can be sustained. Keith Lerner, co-chief investment officer at Truist Advisory Services, believes that breaking above 4,400 is crucial to reverse the downtrend that began in October. Meanwhile, other analysts remain skeptical of a year-end rally in stocks, as they believe that equities do not fully reflect the expectation of interest rates remaining high in the long term.
In conclusion, traders are cautiously optimistic about the stock market as they anticipate Fed rate cuts in the coming year while also expecting policymakers to push back against market expectations of significant easing of financial conditions. The market rally last week was driven by oversold technical conditions and positioning. However, the recent increase in Treasury yields and the heavy slate of new corporate bond sales have put pressure on equities. Traders will closely monitor upcoming Fed speeches, including one by Chair Jerome Powell, to gain insight into the future path of interest rate cuts. Additionally, the release of the SLOOS today will provide further information on bank lending trends. The S&P 500 faces key levels at 4,355 and 4,400, which will determine the sustainability of the market rebound.
