Off-center
"In the short run, the market is a voting machine, but in the long run, it is a weighing machine." — Benjamin Graham
Hey, Risers!
Dangerously unbalanced.
Bulls win 3-0! The third consecutive week of rising indices kept the bears at bay. Bulls were in charge as Treasuries kept falling as weekly auctions were again, listless. An increased anticipation of a dovish global monetary pivot, combined with earnings that were better-than-feared drove the price action.
However, we believe that the S&P is dangerously unbalanced, resting on the back of just a handful of mega-cap heavyweights (the Magnificent Seven stocks) while the rest of the market takes it on the chin. It was a big earnings week as well, which ran the gamut from amazement to disappointment. We will, as always, stick to our knitting and rely on a disciplined approach.
Economy & Markets
Misaligned.
Skewed
The perspectives on monetary policy between the market and the Federal Reserve are diverging, with the Fed poised to resist the market's stance. The market’s expectations of rate cuts next year may well be quashed by the Fed, which is intent on bringing inflation down to 2%.
Our take: Standing pat.
Disinflation
The headline CPI (Consumer Price Index) was flat month over month, lower than the Street’s +0.1% forecast. On a year over year basis, it was +3.2% vs. +3.7% in September and below the Street’s +3.3% forecast.
While the markets cheered, a modification in the government's methodology for calculating healthcare costs may exert upward pressure on the CPI in the short term. The last 2% of core disinflation will be very hard to come by, requiring the Fed to stay vigilant for an extended period.
Our take: Disinflation’s last mile problem.
Not Working
Initial jobless claims rose to 231,000 from the week prior, which was revised to 218,000. Forecasts were for initial claims of 220,000.
Our take: The job market is starting to crack.
Learning Block: Reverse Repurchase Agreement
An important tool.
The Reverse Repurchase Agreement (RRP) balance plays a pivotal role in the monetary policy toolkit, particularly for central banks like the Federal Reserve. In essence, RRP is a financial transaction in which the central bank sells securities to financial institutions with an agreement to repurchase them at a later date. The RRP balance represents the total value of these outstanding agreements.
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