- Hawkish forward guidance from the Fed surprised markets, leading to a selloff in risk assets. The tone going into next year is higher for longer driven by lingering inflation fears. Markets are pricing a 35% chance that inflation will be 3% or higher by end of 2025. As discussed in a prior entry, the relatively high base effects throughout the first half of next year lead me to believe that inflation fears are misguided and the 2% goal is likely to be achieved.
- The beginning of the rate cutting cycle on Sept 18th coincided with bottoms in long-dated treasury yields and the DXY. With the rate cutting cycle now complete, I believe the top is in for these assets.
- I do not see this pullback getting close to 10%. The Santa Claus rally should pick back up next week.
- I’m hearing quite a bit of chatter about recessions and bubbles. Markets do not top when a significant number of participants are raising the alarm over such issues. Markets instead top when the bears have puked up their guts and thrown in the towel.
