December 18, 2023
Good morning,
Markets have moved quickly from pricing in the bearish narrative “higher for longer” during the three months of August through October, to pricing in the bullish narrative “early and often” over the past two months. Meanwhile, since August, the Fed has moved from a tightening bias to a neutral bias. This sets up a source of tension for next year: the reconciliation of market pricing versus the central bank’s stated intentions for policy.
Economic outcomes, particularly changes in inflation, will help shape the resolution of the discrepancy. I suspect any resolution will be like a leaky faucet – drip, drip, drip. As opposed to the fire-hose frenzy of the past few weeks where markets seem to have once again jumped well ahead of the Fed’s stated intentions.
Momentum has been strong enough to support prices for the last two holiday-filled weeks of the year. But the market is already registering extremely high overbought readings on several sentiment gauges. Reconciliation is likely waiting for us in January.
Be well,
Mike
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