After a stellar year, US stocks are hoping to get some festive cheer in the shape of a Santa rally. While the Magnificent Seven have taken all the plaudits and pushed the major indices to (near)record highs, encouragingly the market breadth has broadened in recent months. In general, the greater the number of stocks that are helping push the overall market higher, the more support the market has.
December has historically been a favourable month for US stocks. According to Dow Jones, the S&P 500 has ended higher in December more often than any other month. In fact, since 1950, the last week of December and the first two trading days of the new year have produced a positive return for the S&P 500 nearly 79% of the time. That is the true meaning of a Santa rally and the bullish momentum in US stock indices still appears to be strong, if a little overbought.
The dollar has broken down to new multi-month lows with prices last seen in August. We are mindful of month end and year end flows, as well as much less liquidity in the market around this holiday period. A softer than expected inflation report but very strong durable goods data on Friday saw the dollar try to cling to support around 102. The next level on the Dollar Index chart is a minor Fib level of the summer rally at 101.24. There is currently a 15% chance of a rate cut at the first FOMC meeting of the year in late January, which rises to above 80% at its mid-March decision.
There is little on the calendar in a holiday-shortened week. But yen watchers may be checking out a speech on Monday by BoJ Governor Ueda. Tuesday’s Japan employment data for November and Wednesday’s summary of opinions from the latest BoJ meeting will also be worth monitoring.
The BoJ kept policy and its dovish guidance unchanged in December and pushed back against the notion that it will begin tightening soon. But it did note that inflation is likely to remain above 2% through 2024. Markets currently assign an 80% probability for the BoJ to exit negative interest rates in April, which is when the springtime wage negotiations will conclude. Next week’s events could shape this pricing and be a driver for the yen.