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Hello Stock Traders,

While whispers of a slowdown echo through the economic landscape, a full-blown recession seems to be taking a siesta for now. This mixed bag of data leaves investors grappling with a crucial question: is a bull run about to stampede onto the scene?

The December jobs report delivered a confusing narrative. The services PMI employment index nosedived, suggesting hiring went on a vacation, while total nonfarm payrolls painted a different picture, adding a healthy 216,000. However, excluding government hiring, the number shrinks, and revisions cast further shadows.

“It’s a messy picture,” I admit, channeling my inner detective. But sifting through the data, a possibility emerges: a Goldilocks scenario. Growth, jobs, and inflation might cool down significantly, but not dramatically, creating the perfect porridge-like environment for the Fed to cut rates. And that, friends, could be the spark that ignites the bull run.

The Sahm Rule, a recession whisperer of sorts, raised an eyebrow at the unemployment rate’s recent climb. We’re not near the “recession alarm” level yet, but it’s getting closer. However, historical comparisons offer a sigh of relief. Similar unemployment bumps in 1998 and 2003 didn’t translate into immediate recessions, and the Fed’s own forecast paints a rosy picture of 2.5% inflation-adjusted growth in the last quarter.

The PMI’s employment reading might be wearing a seasonal disguise, and the unemployment rate may be elevated, but the magic 0.5 threshold remains comfortably distant. So, while growth seems to be taking a breather, a full-blown economic winter nap appears unlikely.

For investors, this potential slowdown has a silver lining: rate cuts. And who wouldn’t love a little dovish melody from the Fed? Richmond Fed President Barkin’s recent comments seem to be humming that very tune, hinting at a willingness to “toggle rates back” once inflation is tamed.

The inflation dragon, once fierce, is already showing signs of retreat, thanks to several factors. Student loans are back in business, supply chains are getting their act together, and the pandemic’s stimulus sugar rush is fading. Automation and AI, those tireless efficiency robots, are also keeping labor costs in check.

Even car prices, those notorious inflation culprits, stayed mostly flat in 2023. And as I’ve argued before, the housing market might soon join the downward spiral.

Nothing gets Wall Street as giddy as the prospect of a “soft landing” with a side of rate cuts. And guess what? That’s the path we seem to be on. So, despite the economic tap dance of mixed signals, my bullish sentiment towards US stocks remains firmly in the spotlight. The stars might be aligning for a market fiesta, and I, for one, am ready to grab my metaphorical dancing shoes.

–James

Up next: Despite near-term uncertainty, gold’s long-term outlook remains bright due to anticipated central bank easing and robust investor demand. 

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As investors adjusted their ties and rolled up their sleeves for the new year, a lingering question hung in the air: How will the Federal Reserve’s actions shape 2024? This question is particularly pressing as traders, riding high on optimism, anticipate up to seven quarter-point rate cuts from the Fed. 

This is a notably more aggressive expectation than the three cuts forecasted by the Fed itself. But as we know in the realm of finance, expectations and reality often have a tenuous relationship.

The upcoming release of the minutes from the Fed’s December 12-13 meeting could be a pivotal moment for recalibrating these expectations. These minutes, more than just a bland recounting of discussions, are a treasure trove that could provide keen insights into the Fed’s inflation outlook.

The stock market, which celebrated the close of last year with a rally, seems to be banking on these rate cuts. The target, as per the Fed’s median forecast, is to bring down the fed-funds rate to around 4.6%.

However, not all Fed officials are on board with this narrative of rate reductions. New York Fed President John Williams, for instance, has termed such discussions as “premature.” This signals a potential divergence in views within the Fed and introduces a degree of uncertainty.

Lauren Henderson of Stifel, Nicolaus & Co. makes an astute observation. She suggests that if the Fed minutes reveal a dovish stance, content with the current trajectory of inflation, it might reinforce the likelihood of these three rate cuts, or possibly more.

Conversely, if the minutes highlight concerns about persistently high inflation, it could lead to a scaling back of these aggressive rate cut expectations.

On Tuesday, traders in fed funds futures still seemed to lean heavily towards five to seven cuts by year’s end, but there’s a noticeable shift in the timing, with the first cut perhaps not arriving as early as March.

Moreover, the Treasury yields have shown their biggest one-day jumps in almost a month, which is something to keep an eye on.

This divergence of views is fascinating and, frankly, a bit nerve-wracking. The Fed’s December meeting apparently emboldened the market to push its rate-cut expectations even further.

But as former Fed governor Larry Meyer points out, while a midyear onset of rate cuts seems reasonable, there’s an increasing risk of earlier and deeper cuts.

In my view, this sets the stage for an interesting dynamic in the financial markets. The release of the Fed minutes is not just another item on the calendar; it’s a potential turning point.

Will the Fed align with the market’s optimistic outlook, or will it adhere to a more cautious path? This uncertainty adds a layer of suspense to the already complex narrative of 2024’s financial markets.

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