Closing Thoughts for the Week

One of the things that really concerns me is the gap between the haves and the have-nots, not just in the United States, but globally. The one thing that still baffles me though is that despite some pretty robust economic numbers, the market is still pricing in six rate cuts over the next 12 months. To drop the Fed Funds rate by 150 basis points doesn’t seem reasonable to me. The risk of a repricing is growing.

For the second straight week, we’ve gotten a 2023-ish move higher in equities, which means most of the gains were limited to the usual favorites again - large-cap, tech and growth. It’s possible we’ve moved back to the point where investors are talking themselves down a bit from peak rate cut enthusiasm. One phenomenon we have seen over the past two weeks is higher stock prices coupled with lower long-term Treasury prices.

The subdued PPI report was enough to adjust the market’s expectation to 7 quarter point rate cuts by the end of 2024 and give 2023’s winners, mega-cap growth & tech, another jolt. There comes a point where investor expectations become so disconnected from market fundamentals that it almost begs for a correction to pull things back in line. That creates a very wide range of potential outcomes for the bond market.