Will Rebalancing Begin This Week?
Bitcoin Stalling?
KR Opinion
The markets demonstrated significant momentum last week, with major indices continuing their positive trajectory. This strength was particularly evident in mega-cap technology companies, including Apple, NVIDIA, Microsoft, Tesla, and Amazon. Salesforce's exceptional performance set a positive tone and created a substantial flow of market-moving information combined with the latest employment data.
Despite this barrage of data, the markets maintained their stability without any dramatic shifts in the underlying fundamentals. As we enter mid-December, we're approaching the period when institutional investors typically engage in window dressing – adjusting their portfolios for year-end reporting. The prospect of a traditional Christmas rally looms, and current indicators suggest the markets will likely continue their broad sideways movement with a slight upward bias. However, some warning signs of potential downside risk are emerging.
Market attention is now pivoting toward two critical factors: year-end rebalancing and the upcoming Federal Reserve meeting on December 17-18, which will significantly influence market direction in the year's final days. This week, important inflation data will be released, including the Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Current forecasts suggest a possible slight uptick in inflation numbers.
Looking further ahead, there's an expectation of an "echo bounce" in inflation as we move into 2025, potentially seeing increases of 0.75% to 1%. This inflationary pattern could substantially impact market dynamics in the new year, possibly triggering a minor correction. However, several immediate matters require attention before we reach that point.
The week ahead features crucial economic data releases. CPI numbers will be released on Wednesday, followed by PPI data and unemployment claims on Thursday. Employment statistics have been notably stable recently, adding another layer to consider in the overall market outlook.
Looking Back on Last Week
This week, the stock market demonstrated a significant divergence between mega-cap stocks and broader market performance. The market-cap-weighted S&P 500 gained 1.0%, while the equal-weighted S&P 500 declined 1.3%, highlighting the dominant influence of large technology companies.
The Vanguard Mega-Cap Growth ETF surged 3.7%, led by companies such as Apple, NVIDIA, Microsoft, Tesla, and Amazon. The rally was partly fueled by renewed AI enthusiasm following Salesforce's positive outlook for its Agentforce AI enterprise system.
Bitcoin made headlines on Thursday when it crossed $100,000 for the first time, though this milestone didn't trigger broader market enthusiasm. The S&P 500 had already posted gains in 11 out of 12 previous sessions, setting multiple record highs.
Sector performance was notably divided. Only three S&P 500 sectors finished higher: consumer discretionary (+5.9%), communication services (+4.1%), and information technology (+3.4%). The remaining eight sectors declined, with losses ranging from 0.8% (consumer staples) to 4.6% (energy).
Friday's employment report showed 227,000 new jobs in November (KR Forecast consensus: 200,000), with private sector payrolls increasing by 194,000. The unemployment rate rose slightly to 4.2%, while average hourly earnings increased 0.4%. The data supported the market's expectation for a rate cut at the December Fed meeting, with the probability rising above 85%, according to CME FedWatch.
Treasury yields continued declining, with the 2-year yield falling six basis points to 4.10% and the 10-year yield dropping three basis points to 4.15%. The CBOE Volatility Index fell below 13.00, reaching its lowest since mid-July.
Notable economic data included the ISM Manufacturing Index at 48.4% (KR Forecast consensus: 47.6%) and the ISM Non-Manufacturing Index at 52.1% (KR Forecast consensus: 55.5%). October's trade deficit was -$73.8 billion (KR Forecast consensus: -$75.1 billion).
The week concluded with the Nasdaq Composite up 3.3% YTD (+32.3%), the S&P 500 gaining 1.0% (+27.7% YTD). In comparison, the S&P Midcap 400 and Russell 2000 both declined about 1%, reflecting the continued dominance of large-cap stocks in market performance.
Economic Release for the week of December 9th
Starting December 9th, we'll see Wholesale Inventories data for October. The KR Forecast is at 0.2%, matching the consensus, following a previous reading of -0.2%.
The week begins on December 10th with the NFIB Small Business Optimism Index for November, which follows October's reading of 93.7. The same day brings the final Q3 Productivity numbers, with the KR Forecast at 2.2% and Q3 Unit Labor Costs forecasted at 1.9%.
December 11th brings several key reports.
The day starts with MBA Mortgage Applications, following the previous week's 2.8% increase. The highly anticipated November CPI data will be released, with the KR Forecast at 0.2% and consensus at 0.3%. Core CPI is expected to hold steady at 0.3%. Later, we'll see EIA Crude Oil Inventories, following the previous week's 5.07M barrel drawdown, and the November Treasury Budget, following October's $257.0B deficit.
December 12th is another busy day, featuring Initial Claims (KR Forecast: 222K) and Continuing Claims (previous: 1871K). According to KR Forecast, the November PPI report is expected to show a 0.2% increase, with consensus at 0.3%. Core PPI is forecasted at 0.2% by KR, following the previous 0.3% reading. The day concludes with EIA Natural Gas Inventory data, following the previous week's 30 bcf withdrawal.
The week ends on December 13th with November's Import and Export Price data. The previous readings showed Export Prices up 0.8% (0.6% excluding agriculture) and Import Prices up 0.3% (0.2% excluding oil).
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