When the Federal Reserve cut interest rates again by 25 bps this month, markets were sure that rates would fall again next month. That narrative changed.
The U.S. posted strong U.S. economic and inflation data. Last Friday, the Commerce Department’s Census Bureau reported a 0.4% increase in retail sales in October. It also revised September sales to 0.8%. Prices for imported goods also rose.
The data cuts the chances of a December rate cut by 10%. Stock markets will need to re-think what the Fed considers the neutral rate. In response to the data, Treasury Bond yields rose. The TLT and IEF exchange-traded funds both traded lower in response.
Markets remain bullish on the economy. Bank stocks like JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) are trading at their highs for the year. In a strong economy, banks will benefit with more deals, along with merger and acquisition activities.
The U.S. dollar is also stronger. Investors bullish on the currency may hold the USD Index Bullish Fund (UUP). Conversely, the Canadian Dollar (FXC) closed at a multi-year low of $69.43 at the end of last week. If the Bank of Canada cuts rates by 50 bps, its dollars will fall further. The Yen (FXY), Euro (FXE), and Pound (FXB) also slumped sharply.
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