Rate cut hopes dashed, Russell 2000 and Nasdaq end recent rally

Fed minutes of its last meeting dampened hopes of early interest rate cuts after lunch, with the cyclical and small-cap Russell 2000 off 1.1% and Nasdaq off 0.6% despite some AI-linked stocks rallying. Elsewhere, gold passed the 2K mark for the first time since May, but the rally in Oil wasn’t sustained. Sterling was firmer against the dollar on the eve of the UK Budget.

TODAY’S MAJOR NEWS

Wall Street might be a tad optimistic on rate cuts

The recent rally in equities and bonds driven by the ‘rate cuts in spring’ narrative might be a tad optimistic. Economic growth is slowing, and the labor market is weakening, but perhaps not fast enough to bring the inflation rate required to cut official rates. Federal Reserve officials have no appetite to cut rates soon. At the same time, inflation remains elevated, according to minutes of the October 31-November Federal Open Market Committee, stating: “In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time.” There is no indication in the minutes that members even discussed when they might start lowering rates.

The Fed's favored inflation measure, the Personal consumption expenditures price index, showed core inflation at 3.7% annually in September, a significant improvement but still well above the Fed’s 2% inflation target. Fed officials Q4 GDP to “slow markedly” from the 4.9% increase in Q3, with risks skewed to the downside, while risks to inflation are on the upside. Forecasters expect economic growth to slow considerably, and the Atlanta Fed’s GDPNow tracker is pointing to growth of only 2% in the fourth quarter.

Sterling rallies ahead of UK Budget speech

Serling pushed higher ahead of expected tax cuts at Wednesday's Budget speech from UK finance minister Jeremy Hunt. Britain borrowed less than predicted by its budget forecasters in the first seven months of the financial year, pointing to some fiscal loosening into what's likely to be an election year. Sterling has been stronger versus the dollar recently, up from its $1.21 low to $1.25 but still shy of July’s $1.31 high.

US home sales continue to fall

• A combination of high mortgage rates, ongoing economic uncertainty, high prices, and limited inventories continues to keep US home buyers at bay.
• Existing home sales fell sharply in October to an annualized rate of 3.79 million, below analyst expectations of a slight drop from September's 3.95 million and hitting the lowest level seen since August 2010
• This was the fifth consecutive monthly decline, and the 4.1% month-over-month drop is the sharpest seen since November of 2022
• Median home sales prices fell 0.3% month-on-month, the fourth consecutive monthly drop
• Prices are off 4.4% from the June peak, but still 3.4% above the same month last year and only 5.3% below the all-time high
• The number of existing homes for sale did rise to 1.15 million in October, a 1.8% increase from the month prior, though this remains very low historically

US retail sales show signs of strength

• This morning's Johnson Redbook Index, an independent gauge of US retail sales, saw a 3.4% year-on-year growth in spending for the week ending November 18^th, after 4.48% year-on-year growth seen in October
• The Redbook Index is a proprietary indicator of growth in retail sales, compiling same-store data from around 9,000 stores that represent over 80% of the official Department of Commerce figures
• October's official retail sales figures were disappointing, showing a month-on-month decline for the first time since March, so this independent report of continuing growth is intriguing
• Elsewhere, earnings from quoted retailers disappointed with shares of companies like Lowe's, Best Buy, American Eagle Outfitters, and Kohl’s all dropping on Tuesday as a pullback in consumer spending clouded forecasts and registered a hit to sales

Softer National Activity Index

• The Chicago Fed’s October National Activity Index provided another signal that the economy (readings below zero indicate below-trend growth). Its National Activity Index fell to a -0.49 reading, when an unchanged reading was expected, and September’s reading was revised lower from 0.02 to -0.02

TODAY’S MAJOR MARKETS

Profit-taking ahead of Thanksgiving break

• The Russell 2000 fell 1.1% as traders squared books ahead of the holiday break, with the Nasdaq off 0.6% and the S&P 500 off 0.2%
• Foreign equity markets were pretty much unchanged
• The VIX, Wall Street’s fear index, fell to 13.3, close to its year-to-date low and emphasizing how little risk is priced into equity markets

Bonds yields unchanged, Sterling up

• 2- and 10-year yields were a shade lower at 4.88% and 4.43%, respectively
• The dollar index was up 0.3% to 103.5
• Versus the dollar, Sterling was the standout, up 0.3%, with the Euro off 0.2% and the Yen up 0.2%

Gold tops 2K

• Oil prices pulled back 0.5% to $77.4 per barrel
• Gold prices topped $2,000 per ounce for the first time since May, up 1.1%, while Silver prices rose 1.2% to $23.9 per ounce
• The agriculture complex was mixed

Analysis by Mike Castle, Senior Analyst: Mike.Castle@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com