Wall Street began December as well as it ended November... even better, since after a few more hesitant sessions after November 19, the Dow Jones gained +0.82% to 36,245 (+2.4% hebdo) and equalled within 0.5% its all-time best close of November 2021 and within 1.5% that of January 4, 2022 (around 36,800), while the S&P500 gained +0.59% to nearly 4,595.

The US indices close their fifth week of gains without a single retracement of more than 1%, with an incredible, almost supernatural ratio of five rises to one fall: 19 gains, two declines of -0.08%, two of -0.2% and only one decent fall of -0.8%, i.e. -1.36% drawdown since October 27 for a gain of 10.4%.

Such an absence of consolidation - even symbolic - is absolutely exceptional: it's true that there have been larger rebounds in the past, but after indexed falls of -30 or -50%. And these rebounds were punctuated by sharp corrections: a bullish scenario that unfolds so inexorably is unprecedented in the 21st century.

The key to today's euphoria is that investors have become virtually certain that Jerome Powell's comments on December 1 - over and above the de rigueur language concerning the fight against inflation - confirm that the Fed is indeed finished with rate hikes (which was anticipated from November 1), and that the next topic of reflection will concern the timing of rate cuts.

The market, already in 'rally mode', is now in 'full bull': there are virtually no buyers left, and hardly anyone to hedge. The supremacy of calls over puts has sent the VIX crashing from -2.25% to 12.60, and over the past 10 days it has reached levels of complacency matched only by those seen in mid-December 2019.

There is an enormous amount of liquidity in the market, despite the Fed's asset resale program, as the US Treasury has issued far more cash on behalf of the government since June than has been "mopped up" over the past five months.

As a result, investors have already completely forgotten the OECD's downward revision of expectations for a sharp slowdown in activity in 2024, with GDP down from 2.4% to 1.5%: there is so much liquidity and optimism that the idea of even a moderate recession has been completely evacuated.

Goldilocks are back for 2024: inflation will continue to fall, but GDP will remain much stronger than envisaged a month ago, when US 10-year yields were flirting with 5%.

Friday's rate easing was once again spectacular, with the T-Bond yield collapsing by -14 basis points to 4.2050% (i.e. -26 bp 'hebdo', the equivalent of a further 25 bp of Fed easing anticipated for 2024).

This easing boosted banking stocks (especially regional banks, which have been in great difficulty since mid-March): Zions soared +7.6%, Keycorp +6.7%, Comerica +6.6% and Goldman Sachs +2%. The Nasdaq (+0.55% to 14305) benefited less from the rate cut and was weighed down by Marvel -5.3%, Intel -2.2% and Microsoft -1.2%.

Goldman Sachs estimates the probability of the Fed cutting rates as early as March 2024 at over 50%, but sees oil moving between $80 and $100 in 2024, meaning that lower energy prices will no longer be the driving force behind a slowdown in inflation next year.

In terms of figures, the contraction of the US manufacturing industry slowed in November, according to the ISM index, which came out perfectly unchanged last month at 46.7, whereas economists were expecting it to rise. Published a little earlier, the S&P Global manufacturing PMI finally came in at 49.4, in line with its 'flash' estimate and after 50 for October.

Copyright (c) 2023 CercleFinance.com. All rights reserved.