Upbeat Economic Data Unleashes More Selling

Signs of U.S. economic strength dented the appetite for risk yesterday as the economy doesn’t look like a recession is imminent anytime soon. U.S. third-quarter GDP growth was unexpectedly revised to a 3.2% annualized rate, from 2.9 % in November. Weekly initial jobless claims numbers were also lower-than-expected at 216,000, below the 222,000-consensus forecast.

This data supports the Fed’s case for more ongoing rate increases.  Wall Street still is pricing in one more rate hike at the February FOMC meeting, and if the labor market does exhibit a meaningful break at the beginning of next year, a March hike may start to get priced in.

Despite the nearly one-year bear market, most investors continue to indulge in quite a bit of wishful thinking in support of the narrative that mere moderation in the economy with a mild recession will bring inflation down.  If so, the Fed can pivot back towards the path of easy money.

However, the market continues to behave in way that suggests more selling is needed to have the bulls finally buy into the Fed’s increasingly hawkish position that they are going to raise rates to a higher-than-expected level and maintain them for quite some time.

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