Over the past week we saw a subtle fundamental shift, but sometimes that is all it takes to get a trend rolling.
It started with the Fed hinting at a more neutral stance. A fourth interest rate cut had been widely expected in the December FOMC meeting. That may not happen now as some members believe the accommodative stance has run its course. Furthermore, the recent data support moving from a dovish position to neutral. Last week’s job report was stronger than expected, and the revisions showed even more job growth than was previously reported. That news incited a rise in rates and stocks, while gold, yen, and interest rate futures and ETFs fell.
Normally, the nonfarm productivity and unit labor cost report has little if any impact. But this week’s report saw a big unexpected uptick in labor costs. That may be a sign of impending inflation. For this reason alone, the Fed might take a bit more hawkish stance. On top of this, Chicago Fed President Charles Evans mentioned that after three rate cuts, policy has been accommodative enough. To add to the euphoria, talks with China have improved, and there were some rollbacks of recent tariffs.
Looking ahead to next week, we get inflation and sales data. If these numbers come as expected or higher, stock indexes should remain steady to firm and the usual ETF havens ((NYSEARCA:TLT), (NYSEARCA:IEI), (NYSEARCA:GLD), (NYSEARCA:SLV), (NYSEARCA:FXY) should either stabilize or continue lower.
Option spreads are probably the best approach for this environment because the speed of the recent moves in many markets is well above the norm. When markets get overbought/oversold, shoot for some theta.