[New York Stock Market] Rally on Pivot and Soft Landing Expectations... Dow Hits Record High for Second Day

November Retail Sales Growth Rate Expected to Exceed Forecast

The three major indices of the U.S. New York stock market continued their rally on the 14th (local time) amid expectations of a Federal Reserve (Fed) interest rate cut. The increase in retail sales also raised hopes for a soft landing. The yield on the U.S. 10-year Treasury note fell into the 3% range for the first time since the end of July.

[Image source=AFP Yonhap News]

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 37,248.35, up 0.43% from the previous session. It marked the highest level for two consecutive days. The S&P 500, which is centered on large-cap stocks, rose 0.26% to 4,719.55, and the tech-heavy Nasdaq index closed up 0.2% at 14,761.56.

By individual stocks, solar-related shares rose. The Invesco Solar Exchange-Traded Fund (ETF) increased by 8.1%, while Sunrise and Inpays surged 20% and 12%, respectively. Moderna jumped 9.3% following clinical results showing that using the company’s customized messenger ribonucleic acid (mRNA) vaccine together with Merck & Company (MSD)’s immuno-oncology drug Keytruda significantly reduces the risk of skin cancer recurrence or death.

The previous day, Fed Chair Jerome Powell’s more dovish-than-expected message boosted expectations for a rate cut, driving the stock market higher. As expected, the Fed held the benchmark interest rate steady at 5.25?5.5% for the third consecutive time. Chair Powell stated, "Discussions about when policy easing (rate cuts) would be appropriate have become more visible." This hinted at the possibility of ending monetary tightening.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on the morning of that day priced in a 64.7% chance that the Fed would cut the benchmark rate to 5?5.25% at the Federal Open Market Committee (FOMC) meeting in March next year. This is about a 30 percentage point increase from 34.6% a month ago.

Michael Gapen, Chief Economist at Bank of America (BoA), analyzed, "The Fed delivered a dovish pivot message at the December meeting. We did not expect the Fed to move toward an overt easing bias, but we thought it would shift toward a balanced direction, and that is exactly what happened."

Indicators boosting expectations for a soft landing of the U.S. economy also fueled the stock market rally. According to the U.S. Department of Commerce, November retail sales rose 0.3% month-over-month to $705.7 billion. This was stronger than the expert forecast of a 0.1% decline compiled by The Wall Street Journal (WSJ). It also improved from the previous month’s revised decline of 0.2%. Thanks to the Black Friday effect, the figure exceeded expectations. This further raised hopes for a so-called soft landing, where inflation slows without a recession.

Andrew Hunter of Capital Economics said, "The rebound in November retail sales shows that a sharp easing of inflation does not lead to an economic slowdown."

The yield on the U.S. 10-year Treasury note was 3.927% as of 4:48 p.m. that day, down 11 basis points (1 bp = 0.01 percentage points) from the previous trading day. This is the first time since the end of July (3.967%) that the 10-year U.S. Treasury yield has fallen below 4%. The yield on the 2-year U.S. Treasury note, which is sensitive to Fed monetary policy, dropped 9.3 basis points to 4.388%.

However, there are also concerns that the stock market is overheated. Joe Brusuelas, Chief Economist at RMS US, said, "The Fed will not cut rates before June next year," adding, "(The stock market rally) is too much and too early considering the fundamental economic conditions."