Treasuries climb as Fedspeak rekindles pivot bets

Treasuries extended their November rally, the dollar fell and stocks edged higher on speculation the Federal Reserve is done with interest-rate hikes and will be able to ease policy next year.

Fed swaps are now anticipating over 100 basis points of rate cuts by the end of 2024.

In a speech entitled “Something Appears to Be Giving,” Governor Christopher Waller – one of the most-hawkish officials – said he’s “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%.

“While acknowledging the many uncertainties, his colleague Michelle Bowman refrained from telegraphing an imminent hike.

To Peter Williams at 22V Research, the chances of a dovish pivot or reset seem to be increasing even as Fed-induced recession odds recede.

“It is growing expectations that the Fed and other major central banks are basically done with hiking interest rates,” said Fawad Razaqzada, market analyst at City Index and Forex.com.

“Markets are getting a bit over excited, but traders are just looking to take advantage of the momentum – and will be asking questions later.”

Two-year yields dropped 14 basis points to around 4.75%. The dollar fell to its lowest since August. After swinging between small gains and losses, the S&P 500 managed to close with a small advance.

The gauge, which is trading near “overbought” levels, is still headed toward one of its biggest November gains on record. Bitcoin climbed back above $38,000.

Also speaking Tuesday, Chicago Fed President Austan Goolsbee said the inflation slowdown this year has been the biggest such drop in 71 years.

His New York counterpart John Williams called the decline encouraging.

U.S. consumer confidence rose for the first time in four months in November, aided by more optimistic views about the outlook for the labor market.

Home prices hit a fresh record high, according to seasonally adjusted data from S&P CoreLogic Case-Shiller.

The good news for investors is that recession isn’t here yet, this makes an end-of-year rally likely, according to Lauren Goodwin at New York Life Investments.

In past economic cycles, markets don’t tend to price in recession until jobless claims are rising and earnings are in outright decline – signs that recession has already arrived, she noted.

“Modest slowdowns in inflation and employment growth mean that a ‘Fed relief rally,’ accompanied by rallies in stocks, bonds and credit as we are seeing now, can be sustained,” Goodwin said.

“Our concern is that this late cycle limbo is no different than those of the past: a moment of Goldilocks before the very reason that inflation is moderating – slowing economic growth and employment – becomes clear in the data.”

The most-active investors in the Treasury market are as bullish as they’ve ever been, according to a weekly survey conducted by JPMorgan Chase & Co. since 1991.

JPMorgan’s Treasury client survey for the week ended Nov. 27 found that 78% of active clients were positioned long relative to their benchmark, up from 56% the previous week.

None of them were positioned short for a second straight week, for a 78% net long position that was the biggest in the history of the survey. The remaining respondents were neutral.

The recent sharp pullback in volatility as year-end approaches creates hedging opportunities given the cloudy outlook for equities, according to Goldman Sachs Group Inc. strategist Christian Mueller-Glissmann.

“After the recent equity rally, we believe there is an attractive entry point to hedge the risk of a retracement,” he noted.

“Cross-asset volatility has continued to reset lower, supported by markets further embracing the ‘inverse’ Goldilocks backdrop in the U.S. with faster-than-expected inflation normalization and growth remaining resilient.”

That drop has further widened the gap to rates volatility, which should normalize in 2024, he added

Bank of America Corp. clients were net buyers of U.S. equities last week, with institutional and retail investors leading purchases while hedge funds offloaded shares.

Clients funneled $2.6 billion into U.S. stocks, with inflows to both individual names and exchange-traded funds, quantitative strategists led by Jill Carey Hall said.

This month’s rally in the S&P 500 is now running out of steam, according to Citigroup Inc. strategist Chris Montagu. He said futures flows last week were “mixed,” leaving net positioning in the benchmark index looking “slightly bearish.”

A Bloomberg Intelligence model known as the Market Regime Index – which clusters periods into three phases dubbed accelerated growth (green), moderate growth (yellow) and decline (red) – has remained stuck in the middle for the past nine months.

That suggests that equity-return expectations should remain average until the Fed shifts away from raising interest rates to cutting them, according to BI’s chief equity strategist Gina Martin Adams and senior associate analyst Gillian Wolff.

Meantime, hedge funds piled into bullish dollar bets this month despite the currency’s slide on softening U.S. economic data and increasing expectations that the Fed’s most aggressive rate-hiking cycle in a generation is near an end.

A metric of leveraged funds’ net longs on the greenback against eight currencies rose to its highest level since February 2022 as of Nov. 21, according to data from the Commodity Futures Trading Commission aggregated by Bloomberg.

It stood at net long 103,042 contracts, just above a previous year-to-date high seen in April, after bottoming around a net short position of around 72,000 contracts in March.

“The U.S. dollar has been weakening across the board as the market becomes increasingly convinced that the next move from the U.S. central bank will be to cut interest rates, possibly as early as the second quarter,” Razaqzada noted.

Elsewhere, oil snapped a three-session losing streak as OPEC+ members continued negotiations over output levels.