Stocks Rally, Yields Fall After Fed's Mixed Message

US equities advanced, and yields declined following recent signals from a Federal Reserve policymaker, as market participants speculated that the central bank is positioned to orchestrate a smooth economic slowdown and initiate rate cuts.

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The Nasdaq 100 experienced a 0.3% ascent, reaching an all-time high, with the tech-heavy index achieving a record close for the second consecutive session on Monday. The S&P 500 saw a 0.4% increase, nearing an all-time peak. Federal Reserve Bank of Richmond President Thomas Barkin's remarks, suggesting potential rate cuts if progress on inflation persists, influenced the positive market sentiment.

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Simultaneously, there was a surge in new US home construction in November, indicating that builders are continuing to benefit from a limited supply of existing home sales. Residential starts surged by 14.8% last month, reaching a 1.56 million annualized rate, according to government data released on Tuesday.

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Ian Lyngen from BMO Capital Markets characterized the housing sector data as a "solid read" and one that reinforces the narrative of a soft landing. However, he noted that the demand for Treasury bonds persisted even after the positive data.

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Yields on the US 10-year bond, serving as a proxy for mortgage rates, dipped to approximately 3.91%, while the rate on the two-year, sensitive to policy changes, hovered around 4.44%. Investor expectations for rate cuts reached their highest level since the beginning of 2022, as revealed by a Bank of America Corp. survey on Tuesday.

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Despite the optimistic investor sentiment, some policymakers in the US and Europe have attempted to temper expectations for rate cuts. Chicago Fed President Austan Goolsbee and Cleveland Fed's Loretta Mester suggested on Monday that such expectations might be premature. Atlanta Fed President Raphael Bostic is expected to provide additional insights later on Tuesday.

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The mixed messaging from the Federal Reserve prompted Mohamed El-Erian to express concerns, stating that "Fed communication confuses people" and highlighting a significant challenge facing the central bank.

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Earlier in the day, Japan's Nikkei 225 equity index surged, and the yen depreciated after the Bank of Japan maintained its policy rate at -0.10% and indicated a lack of urgency in removing negative interest rates. Japan's central bank stands out as an outlier, having not even commenced tightening policy, in contrast to many peers contemplating the winding down of rate-hike cycles.

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Investors are eagerly awaiting this week's data releases, including durable goods orders, the final third-quarter gross domestic product estimate, and personal consumption expenditures—the Fed's preferred measure of inflation.

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Oil prices are trading near their highest level in two weeks, driven by more companies avoiding the Red Sea following a surge in vessel attacks along the crucial shipping conduit. In the same timeframe, gold, Bitcoin, and the dollar experienced declines.