A November to remember

Markets

US indexes traded flattish into month-end; nonetheless, stock market operators had an impressive run as the S&P 500 index ended the month up nearly 9%, and the Nasdaq Composite rallied almost 11%. It was the best month since July 2022 for both, snapping three months of losing streaks.

Investors have been processing a more favourable inflation trajectory, coupled with some easing in the job market, contributing to downward pressure on interest rates. This overall environment has set a positive tone for risk assets, with many investors recognizing the Federal Reserve's successful management of inflation without inducing a severe recession, a concern that was a massive part of the 2023 narrative.

The narrative for November can be characterized as a story of realization, recognition, and capitulation, particularly regarding the direction of interest rates and the outlook ahead. The month commenced with yields on 10-year Treasuries at 4.90%, but they are now poised to conclude nearly 60 basis points lower, providing a favourable boost to stock valuations.

When peering through the looking-glass lens, uncertainties persist amid geopolitical risks such as Russia/Ukraine tensions, Middle East dynamics, the upcoming US Presidential election, and the lagged effects of prolonged higher interest rates. However, potentially more significant than the current "known known" risks are the tail risks that markets have grappled with throughout this extended post-pandemic period, specifically inflation, which is gradually diminishing.

Critical personal spending and inflation data from the US, released on Thursday, largely met expectations, reinforcing the narrative that defines a "November To Remember" for bonds.

In October, core PCE (Personal Consumption Expenditures) price growth registered a 0.2% increase on a month-on-month basis, aligning with estimates. The unrounded figure was 0.16345%. The measure climbed by 3.5% on a year-on-year basis, consistent with consensus forecasts. October's results represent the slowest pace of annual core price growth since April 2021, when inflation accelerated significantly in the US.

This update aligns with the broader narrative of a notable shift in Federal Reserve rhetoric during the week, particularly regarding the potential for "insurance cuts" in 2024.

Chris Waller played a pivotal role in altering perceptions, inadvertently initiating a game change. Bonds experienced one of their best months since 2008, with the Bloomberg Aggregate gauge poised for its most substantial monthly performance since the Reagan era.

Despite these shifts, Thursday's data revealed that spending remained relatively resilient the previous month, with real spending increasing by 0.2%, surpassing expectations for a marginal rise.

The combination of resilient spending and cooler inflation is a recipe for Goldilocks.

With the diminishing necessity for the Federal Reserve to raise rates in response to inflation concerns, the prevailing sentiment suggests that the central bank's next move will likely involve rate cuts. Throughout November, markets have progressively factored in a higher probability of the Fed implementing substantial rate cuts in the upcoming year.

Decelerating inflation, Fed cuts, and above-expectations growth may be a constructive backdrop for stocks. However, falling costs indicate a reversal of profit-led inflation, suggesting corporate margins may have peaked and equity P/E multiples are a bit stretched. So perhaps earnings, not lower rates, will need to do the heavy lifting for stocks in the future as there are many Fed cuts in the pipeline.

Oil market

Oil prices declined as OPEC underdelivered on production cuts. While Saudi Arabia, Russia, and certain OPEC+ members agreed to voluntary output cuts of 2.2 million barrels per day (bpd) for the first quarter of 2024, the reduction fell short of market expectations. Saudi Arabia maintained a 1 million bpd production cut that had been in place since July, and Russia increased its pledged reduction from 300,000 bpd to 500,000 bpd.

Only eight of the 24 OPEC+ countries voluntarily agreed to reduce supply in the first quarter. The decision followed a ministerial meeting delayed until November 26 due to pushback from OPEC countries in Africa against additional cuts.

The discord among OPEC’s African ranks is bearish, and whether or not Russia sticks to the plan is anyone's guess. So, for oil markets to turn bullish, visible inventory data must drop to confirm that OPEC cuts are enough to diminish the current supply overhang.