Federal Reserve Could Slash Rates. November 2023 was a month of significant shifts in the financial landscape, with key indicators and market movements shaping the economic narrative. The Dow Jones Industrial Average, a barometer of the broader market, surged by 500 points to reach a new high for 2023, propelled by a remarkable 9.2% jump in Salesforce shares. The S&P 500 followed suit with a 0.4% increase, while the Nasdaq experienced a slight dip of 0.2%. These movements reflect a complex interplay of factors, including company-specific performances and macroeconomic trends.
Salesforce and United Health Lead the Way
The standout performer contributing to the Dow’s rally was Salesforce, with its shares witnessing an impressive 9.2% surge. The cloud computing giant reported better-than-expected earnings and revenue for the third quarter. As well as raising its guidance for the full year. Salesforce also announced a $27.7 billion deal to acquire Slack, a popular workplace communication platform. In a move that could strengthen its position in the software market.
Another strong performer was United Health, with its shares advancing by 3.4% to hit a 52-week high of $552.98. The health care company benefited from positive analyst ratings and a favorable outlook for its business segments. United Health also announced a partnership with Amazon to offer prescription drug discounts to Prime members. A deal that could boost its customer base and revenue.
These two companies, along with other leaders in the healthcare, industrials, and financials sectors, outperformed the market, highlighting investor confidence in these areas.
Inflation Moderation and Federal Reserve Expectations
One of the macroeconomic factors influencing the market was the inflation data. October saw a notable deceleration in Personal Consumption Expenditure (PCE) inflation measures, the Fed’s preferred gauge of price changes. The core PCE index, which excludes food and energy, rose by 1.8% year-over-year, down from 1.9% in September. The headline PCE index, which includes food and energy, increased by 2.1% year-over-year, down from 2.3% in September.
The cooling PCE data has fueled expectations that the Federal Reserve may have concluded its tightening cycle. Potentially signaling rate cuts in the spring of 2024. The Fed has raised its benchmark interest rate four times in 2023, reaching a range of 2.75% to 3%. However, the recent slowdown in inflation, along with other signs of economic weakness. Such as the trade war, the Brexit uncertainty, and the global slowdown, may prompt the Fed to adopt a more dovish stance in the coming months.
This shift in sentiment has implications for various sectors, with tech experiencing a drag while healthcare, industrials, and financials thrive. Tech stocks, which are sensitive to interest rate changes, tend to suffer when rates are high. As they reduce the present value of their future cash flows. On the other hand, sectors that benefit from lower rates, such as healthcare, industrials, and financials, tend to perform well when rates are low. As they increase their borrowing and spending power.
Labor Market and Unemployment
Another factor affecting the market was the labor market data. Concerns about the labor market were evident as continuing jobless claims reached a two-year high. The number of Americans filing for unemployment benefits rose by 7,000 to 218,000 in the week ending November 25th. Slightly above the consensus estimate of 215,000. The four-week moving average of initial claims, which smooths out weekly volatility, increased by 4,750 to 216,250, the highest level since July 2022.
The softening labor market is indicative of ongoing challenges, and the coming months will be crucial in assessing the resilience and recovery of the job market. The unemployment rate remained unchanged at 3.7% in October, the lowest level since 1969. However, the labor force participation rate also remained unchanged at 62.9%, the lowest level since the 1970s. These figures suggest that there is still room for improvement in the labor market. Especially for the marginalized and discouraged workers who have given up on finding a job.
Mixed Signals in Housing and Consumer Spending
Another area of mixed signals was the housing and consumer spending data. While personal spending in the United States rose by 0.2% in October, it marked the smallest advance in five months, reflecting the impact of elevated interest rates. Personal income also rose by 0.2% in October, below the consensus estimate of 0.4%. The personal saving rate, which measures the percentage of disposable income that is saved, remained unchanged at 6.2%.
The housing market presented mixed signals, with pending home sales declining 1.5% month-over-month in October. Reaching the lowest level since records began in 2001. The decline in pending home sales was attributed to limited housing inventory, high home prices, and rising mortgage rates, which have dampened buyer demand.
On the positive side, new home sales rose by 6.2% month-over-month in October, beating the consensus estimate of 4.7%. The increase in new home sales was driven by lower home prices, higher builder incentives. And a shift in buyer preference from existing to new homes.
Chicago PMI and Economic Activity
One of the positive developments in the economic data was the Chicago PMI. The Chicago Business Barometer, also known as the Chicago PMI, climbed to 55.8 in November 2023. Indicating the first month of growth in Chicago’s economic activity since August 2022. A reading above 50 signals expansion, while a reading below 50 signals contraction.
Commodity Markets and EV Industry Dynamics
Another area of interest in the market was the commodity markets, especially the lithium market. Lithium carbonate prices experienced a significant plunge to CNY 120,000 per tonne, driven by low demand and a supply glut. The EV industry faced headwinds in China, impacting lithium demand, while in the U.S. Higher credit costs hampered consumer willingness to make large purchases. Despite these challenges, Mineral Resources plans to double its lithium production in Western Australia next fiscal year.
However, some analysts and industry players remain optimistic about the long-term prospects of the lithium and EV markets. Citing the increasing environmental awareness, technological advancement, and cost reduction. Mineral Resources, an Australian mining company, announced that it plans to double its lithium production in Western Australia next fiscal year, from 750,000 tonnes to 1.5 million tonnes. The company expects that the lithium market will rebound as demand from China and other regions recovers.
Oil Market Dynamics
Another commodity market that attracted attention was the oil market. WTI crude futures fell over 3% to $75 a barrel as OPEC+ announced an additional 1 million barrel-a-day output reduction. Concerns about oversupply and a challenging economic environment contributed to a recent weakening of the oil market, with WTI crude futures falling more than 6% in November.
OPEC+, a group of 24 oil-producing countries led by Saudi Arabia and Russia, agreed to cut their output by 1.2 million barrels per day in December 2022, in an effort to stabilize the oil market and support prices. The group has been implementing the output reduction since January 2023, and has extended it until March 2024. However, the group decided to make an additional cut of 1 million barrels per day for the first quarter of 2024. In response to the rising global oil inventories and the slowing economic growth.
The oil market has been facing a supply-demand imbalance, as the global oil production has exceeded the global oil consumption. The U.S., the world’s largest oil producer, has increased its output to record levels, thanks to the shale oil boom. The U.S. production reached 13.4 million barrels per day in November 2023, up from 11.7 million barrels per day in November 2022. The U.S. has also become a net exporter of oil and petroleum products, adding to the global supply.
The IEA expects the global oil demand to grow by 1 million barrels per day in 2023, down from 1.3 million barrels per day in 2022. The IEA also expects the global oil demand to grow by 1.2 million barrels per day in 2024. Down from 1.4 million barrels per day in its previous forecast.
The oil market is expected to remain volatile in the coming months, as the supply-demand balance remains uncertain. The OPEC+ output reduction may provide some support to the oil prices, but it may also face challenges from the U.S. production and the global demand. The oil market will also be influenced by the geopolitical tensions, such as the U.S.-Iran conflict, the Venezuela crisis, and the Libya unrest. Which could disrupt the oil supply and create price shocks.
Currency Markets and the Dollar’s Movement
The last area of interest in the market was the currency markets, especially the dollar’s movement. The dollar index strengthened to 103.2 at the end of November, benefitting from a falling Euro. The Euro’s depreciation to below $1.092 was influenced by expectations of major central banks transitioning from tightening to rate cuts in the upcoming year. The greenback, however, is on track to end November about 3% lower.
The market has been pricing in the possibility of the Fed cutting rates in 2024, as the economic data has shown signs of slowing down. The market expects the Fed to lower its interest rate by 25 basis points in March 2024, and by another 25 basis points in June 2024, according to the CME FedWatch Tool. The market also expects the Fed to end its balance sheet reduction program, which has been shrinking its holdings of Treasury and mortgage-backed securities, by September 2024.
The dollar’s strength has also been affected by the weakness of other major currencies, especially the Euro. The Euro, which accounts for about 58% of the dollar index, has been depreciating against the dollar, as the European Central Bank (ECB) has been more dovish than the Fed. The ECB has kept its interest rate at zero, and has extended its quantitative easing program, which involves buying bonds to inject liquidity into the economy, until December 2024. The ECB has also announced that it will launch a new series of targeted longer-term refinancing operations (TLTROs), which are cheap loans to banks, in September 2024.
The Euro’s weakness has also been driven by the political and economic uncertainties in the Eurozone, such as the Brexit deadlock, the Italian budget dispute, the French protests, and the German slowdown. The Eurozone’s economic growth has been sluggish, with the GDP expanding by 0.2% quarter-over-quarter in the third quarter of 2023, down from 0.4% in the second quarter. The Eurozone’s inflation has also been subdued, with the annual core inflation rate, which excludes food and energy, falling to 0.9% in November 2023, down from 1% in October.
The dollar’s movement will continue to depend on the relative monetary policy stance of the Fed and other major central banks, as well as the economic and political developments in the U.S. and abroad. The dollar may face some downward pressure in the coming months, as the market anticipates the Fed’s rate cuts and the end of its balance sheet reduction. The dollar may also face some headwinds from the trade war, the fiscal deficit, and the presidential election, which could create uncertainty and volatility in the market.