Consumer’s increasingly confident, but investors take a breath with major indexes and gold at all-time highs

Consumer confidence rose sharply in December, casting a shadow on early rate cuts and stalling the recent equity market rally aside from continued strength in the Russell 2000. Equity markets and gold still look set to end the year on all-time highs, Bitcoin has close to doubled, with interest rate optimism seemingly pulling forward the traditional January rally.

TODAY’S MAJOR NEWS

Strong consumer remains a risk to rate cuts

Strong consumer confidence like that seen this morning spurs economic activity, making it more difficult for the Federal Reserve to hit its 2% inflation mandate – and thus to feel confident in cutting interest rates. The stickiest portions of inflation currently are shelter and wages. Yesterday, we saw a bullish housing market index, showing that falling interest rates spurred a resurgence in housing activity in November. Today, we see that existing home sales rose to an annualized rate of 3.82 million units in November, up 0.8% from 3.79 million in November, up from analyst expectations of 3.775 million and above the highest analyst guess ahead of the report. Existing home sales are still down 7.3% year-on-year, but they're closing the gap.

The next thing we'll need to watch will be overall holiday consumer sales, and the impact that restocking shelves has on manufacturing as we head into the new calendar year.

Consumer confidence surges in December

The Conference Board explained this morning’s major uptick in consumer confidence as reflecting "more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market and personal income prospects over the next six months." This new sense of optimism was prevalent across all ages and household income levels, although the largest gains came among those 35 - 54 years of age, and among those with income levels above $125,000. This month's survey also revealed that consumers remain concerned about rising prices, but the number of responses citing politics, interest rates and global conflicts ticked lower this month.

• The December Consumer Confidence Index surged to 110.7, seven percent ahead of the 101.0 November reading, and well above analyst expectations of 103.4
• The Present Situation Index rose to 148.5 this month, up from 136.5 in November
• The Future Expectations Index jumped to 85.6, up from 77.4 the previous month, and the highest since July
• Consumer expectations for a recession in the next 12 months declined, although two-thirds of the respondents still say that we could see a downturn in 2024

Improving inflation outlook bouys rate cutting hopes

UK inflation slowed much more than expected to 3.9% in November, down from 4.6% last month, and core inflation was also better. Traders are betting that the Bank of England will deliver up to 145 basis points in rate cuts next year, pricing in as much as 145 bps starting in May.

The Fed’s favored inflation measure, the Personal Consumption Expenditures (PCE) Price Index is due out on Friday. While the headline November number is forecast to rise to rise to 3.5% year-on-year in November, versus 3.0% last month, the number tracked by the Fed, ‘core’ PCE ex volatile items like food and energy, is forecast to drop to 2.3% year-on-year in November, versus 3.7% last month. Note that Fed expects core inflation to average 2.6% next year.

Geopolitical risks buoy oil prices

Commodity markets remain focused on Houthi Rebel attacks on civilian ships in the Red Sea, as this Iran-backed group demonstrates its support for Hamas in the Gaza Strip. A number of shipping companies are choosing to avoid travel through the Suez Canal and the Red Sea until their safety can be guaranteed, and that’s not likely to happen for some time. The US is actively working to set up a coalition of nations who would provide escort for ships, but we do not see anything near-term that’s going to lend sufficient confidence to shippers. Many nations simply do not want to get involved in engaging the Houthis. Unfortunately, Somalian pirates are also taking advantage of the situation, striking ships who are parked in the Red Sea while waiting for assurance of safe passage, adding to the problems in the region.

Rerouting cargoes around the southern tip of Africa does not create a shortage of commodities or goods long-term. It does lengthen transit times, while adding to transit expenses as well. As such, it creates a short-term tightening of supplies, which eventually even out as the supply chain adjusts to the longer transit times. However, it does increase the costs of the commodities and goods that are delivered. That adds an element to inflationary pressures, while also increasing uncertainty in the supply chains. The problems of course are not limited to the Red Sea. They’re amplified by problems with low water levels in the Panama Canal that are redirecting cargoes through the Suez Canal and the Red Sea. The other critical area of concern continues to be the Black Sea, particularly if Ukraine would garner both the military capability and the desire to disrupt shipments coming from Russia. The bottom line is that the supply of commodities is not currently the concern so much as shipping logistics, and changes in those logistic risks are raising costs.

US oil stocks rise, remain at typical seasonal levels

• US commercial crude oil stocks rose by 2.9 million to 443.7 million barrels in the week ending December 15, leaving them 1% below the five-year average for mid-December
• Gasoline stocks rose by 2.7 million barrels, 2% below seasonal levels
• Distillate stocks increased by 1.5 million barrels, 10% below levels
• Ethanol stocks rose to 22.9 million barrels, up from 22.1 million the previous week, but down from 24.1 million the previous year

TODAY’S MAJOR MARKETS

Russell 2000 leads market rise, again

• The Russell 2000 was up 0.7% in morning trade, with the S&P 500, Nasdaq, and Dow Jones all unchanged
• The Nikkei 225 rallied another 1.4% after the BoJ held interest rates unchanged, the FTSE 100 was up 1.0%, while the DAX was unchanged
• The VIX, Wall Street’s fear index, was unchanged at 12.4

Bonds rally, Dollar unchanged, Bitcoin strong

• 10-year TIPS index-linked yields held at 1.71% yield
• 2- and 10-year yields fell marginally, at 4.47% and 3.88% yields, respectively
• The dollar index was unchanged at 102.3
• Versus the dollar, Sterling and the Euro were down 0.5% and 0.2%, respectively, while the Yen was unchanged
• Bitcoin looks set to end the year doubling in value, up 4% at $44,000 today having started the year at $22,500

Oil and silver prices rally

• Oil prices rose 0.4% to $74.2 per barrel
• Gold prices were unchanged at $2,050 per ounce, while Silver prices rose 1.2% to $24.6 per ounce
• The grain and oilseed sector has a negative bias at midday, with wheat prices leading the way lower on evidence that Russia continues to pressure world prices.

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com