Marketmind: Fed's 'buy everything' party roars on

[December 15, 2023]  (Reuters) - A look at the day ahead in U.S. and global markets by Amanda Cooper

It's fair to say that markets have been holding on for the Federal Reserve to finally cave and agree with the extremely benign outlook that has been priced in for some time now. And this week, it finally happened.

Chair Jerome Powell not only did not push back against the 150 basis points of rate cuts priced in by markets for 2024, he went so far as to say the time to discuss lower rates was "coming into view".

Cue a rally across practically everything. The Dow Jones scored a second straight record-high close last night, gold has vaulted back above $2,000 an ounce and bitcoin posted a third daily rise.

Stocks are pricing for a Goldilocks-themed 2024 - one where growth slows, but not so badly as to tip the economy into recession - while bonds have embraced the prospect of the scale of rate cuts that usually bring with them a sharper slowdown.

Both cannot be right and 150 basis points of cuts look ambitious, given the labour market is robust, consumer spending is holding up nicely and financial conditions are already at their loosest since July, according to an index compiled by Goldman Sachs.

For now, no one is too bothered about the details. There is also the issue of the huge amount of cash simply parked on the sidelines in money market funds.

Data from the Investment Company Institute this week shows a total of nearly $6 trillion parked in money market funds. Some of that at least will, at some point, be looking for a home, one preferably with some yield attached.

BlackRock data that stretches back to 1995 shows cash has returned an average of 4.5% in the year following the last rate hike of a cycle by the Fed, while U.S. equities have jumped 24.3% and investment grade debt by 13.6%.

A trader reacts as a screen displays the Fed rate announcement on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., December 13, 2023. REUTERS/Brendan McDermid/File Photo

The S&P 500 is up about 23% this year, although much of that gain has been in the tech megacap stocks. The equal-weighted S&P, by contrast, is up just 11%, marking its worst annual performance relative to the benchmark since 1998, when it underperformed to the tune of 16 percentage points.

The mood music today is cheerful. Futures are pointing to an upbeat start on Wall Street later. The S&P is rattling to its seventh straight week of gains, while the Dow's upward path could well have souvenir collectors busily hunting down "40,000" hats. The path there could prove volatile.

Key developments that should provide more direction to U.S. markets later on Friday:

* NY Fed manufacturing index December 0830 ET

* Industrial production November 0915 ET

* S&P Global flash PMIs December 0945 ET

(Reporting by Amanda Cooper; Editing by Nick Macfie)

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