Weekly Market Update: November 25, 2024

Long-term Treasury yields continue to rally. This move higher comes despite the Federal Reserve reducing the federal funds rate by three quarters of a percentage point this fall, to 4.50%-4.75%, and sentiment that it will likely cut by another 25 basis points at the final Federal Open Market Committee (FOMC) meeting of 2024, which commences on December 17th. 

We think there are a few reasons for the recent steepening of the yield curve. This move indicates an expectation across financial markets of higher rates in the future. The October readings on consumer and producer (wholesale) price growth were a bit stronger than expected, which has brought talks that the Fed may have to pause on the interest-rate front at some point next year. Then, there are concerns that the pro-growth policies President-elect Trump will push to implement may ultimately lead to a re-acceleration in inflationary pressures, especially if they include the increased use of trade tariffs. 

Wall Street now forecasts interest rates will be higher than previously expected. Indeed, the low-point expectation of the 2026 federal funds rate, which was hovering around 2.90% earlier this year, has risen to 3.80%. The increased level of short-term rates typically results in a higher yield for 10-year Treasury notes. This sentiment took some of the steam out of the post-election equity market rally. 

Meantime, the consumer sector will be on the radar of Wall Street in the coming weeks. That is because the all-important holiday shopping season for the retailers is at hand. The consumer has proven resilient amid the increased borrowing-cost environment of the last few years, but the expected relief from the Federal Reserve cutting the benchmark short-term interest rate has yet to materialize. This may put some pressure on spending, especially with many Americans faced with maxed out credit card balances. Likewise, with 30-year fixed rate mortgages still averaging around 7.00%, housing affordability remains troublesome. 

Conclusion: With the Federal Reserve still looking like it will cut the federal funds rate next month, along with the economy growing at a healthy pace and corporate profits increasing at a decent clip, the fundamentals appear to be in a place for another late-year “Santa Claus” rally on Wall Street. 

Source: ValueLine.com