Will Fed Surprise Markets?

10-year Reaches a Multi-month Peak...

KR Opinion

The past 36 hours have witnessed an extraordinary transformation in market dynamics, with the WaveTech database registering nearly 5,000 new buy signals. The short-term technical indicators have shown particularly robust responses, reflecting the market's strongly bullish interpretation of election results.

The bullish sentiment has manifested across multiple asset classes, with equities and Bitcoin pushing into new highs. The yield curve's long end continues to adjust, suggesting significant repositioning in fixed-income markets. However, not all sectors participate equally, with real estate facing pressure amid declining mortgage applications.

Today's FOMC decision and Powell's press conference add another layer of complexity to an already eventful week. Markets have largely priced in a 25 basis point rate cut, but the focus will likely be on forward guidance and policy implications. The yield curve movements suggest ongoing adjustments in market expectations about the trajectory of monetary policy.

The election outcome, securing Electoral College and popular vote victories, has been interpreted as a clear mandate. This clarity contrasts sharply with the 2020 election period, contributing to reduced uncertainty in market pricing. Early indicators suggest potential shifts in global political dynamics and possible de-escalation of international conflicts.

While algorithms project continued upside potential, intermediate-term indicators present some challenges as we approach week's end. The abrupt sentiment shift makes near-term extrapolation particularly challenging.

Current market conditions reflect elevated volatility levels, which will likely persist through Thursday's session given the convergence of the FOMC decision, Powell's press conference, multiple economic data releases, and the ongoing earnings season with thousands of reports. The market continues to process election implications while maintaining momentum.

The sudden shift in market sentiment has created a unique trading environment in which traditional consolidation patterns have yet to emerge despite the magnitude of recent moves. This suggests the potential for continued momentum while raising the possibility of eventual mean reversion or consolidation phases.

Thursday's session will likely maintain high volatility as markets process multiple significant catalysts. While the immediate trend remains strongly bullish, traders should remain alert to potential consolidation patterns or reactions given the extent of recent advances and the complex overlay of monetary policy decisions. The evolving geopolitical landscape and its potential impact on global markets adds another dimension, particularly as international reactions to the election outcome continue to develop.

The combination of technical strength, political clarity, and potential global developments creates a complex but potentially opportunistic trading environment. However, the magnitude of recent moves and multiple catalysts warrant careful position management and attention to potential consolidation signals as we navigate through this period of exceptional market activity.

Looking Back on Wednesday’s action

The markets responded unambiguously to Donald Trump's presidential victory and anticipated Republican control of Congress. Major indices rallying strongly on expectations of pro-growth policies. The prospect of lower tax rates and reduced regulations fueled broad-based buying interest, driving the Dow Jones Industrial Average, Nasdaq Composite, S&P 500, and S&P 400 to record highs. The Russell 2000 demonstrated strength with a 5.8% gain.

The financial sector emerged as a standout performer, surging 6.2% on expectations of reduced regulatory oversight and increased capital markets activity. Key financial stocks reflected this optimism, with Goldman Sachs (+12.2 %), KeyCorp (+15.7 %), and Discover Financial Services (+20.3%) posting substantial gains.

Tesla captured significant attention, rising sharply as markets factored in Elon Musk's alliance with the president-elect. Industrial names like Nucor (+16.0%) rallied on anticipated tariff protections under the new administration. The consumer discretionary sector advanced by 3.6%, while the industrials and energy sectors gained 3.9% and 3.5%, respectively.

Not all sectors participated in the rally. Real estate (-2.6%) and utilities (-1.0%) declined as rising rates pressured these yield-sensitive sectors. Consumer staples (-1.6%) faced headwinds from dollar strength and potential tariff implications, with the U.S. Dollar Index climbing 1.6% to 105.12.

Treasury markets experienced significant pressure, with yields rising substantially on growth and inflation expectations. The 2-year yield reached 4.29% before settling at 4.27% (up six basis points), while the 10-year yield touched 4.48% before closing at 4.43% (up fourteen basis points). A well-received $25 billion 30-year bond auction helped moderate the selling pressure.

The mortgage market showed weakness, with the MBA Mortgage Applications Index falling 10.8%, including a 19% drop in refinance applications and 5% decline in purchase applications. These figures suggest potential sensitivity to rising rates in the housing sector.

Markets now turn their attention to Thursday's Federal Open Market Committee decision, expected at 2:00 p.m. ET, followed by Chair Powell's press conference at 2:30 p.m. ET. Consensus expectations point to a 25-basis-point rate cut, bringing the target range to 4.50-4.75%. The interaction between monetary policy and the market's response to political developments will likely shape near-term trading dynamics.

Nasdaq Composite: +26.5%

S&P 500: +24.3%

S&P Midcap 400: +18.2%

Dow Jones Industrial Average: +15.6%

Russell 2000: +18.0%

Thursday's economic releases:

8:30 AM ET

Preliminary Third Quarter Productivity

- KR Forecast: 2.3%

- Previous Reading: 2.5%

Preliminary Third Quarter Unit Labor Costs

- KR Forecast: 0.5%

- Previous Reading: 0.4%

Weekly Jobless Claims Report

- Initial Claims KR Forecast: 222,000

- Previous Initial Claims: 216,000

- Previous Continuing Claims: 1.862 million

10:00 AM ET

September Wholesale Inventories

- KR Forecast: -0.1%

- Previous Reading: 0.1%

10:30 AM ET

Weekly Natural Gas Storage Report

- Previous Change: +78 billion cubic feet

3:00 PM ET

September Consumer Credit

- KR Forecast: $13.5 billion

- Previous Reading: $8.9 billion

WaveTech Database

The market's technical positioning has undergone a remarkable transformation following Wednesday's close, with the database registering 5,220 new entries against only 388 exits. This substantial shift has propelled the bullish percentage from 37% to 50.14%, decisively clearing the critical 42% threshold discussed in the previous analysis.