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US markets traded in a mixed-bag fashion, but the tone of the S&P 500 was rather moody, with losers outpacing winners by a wide margin -- all as markets digest a stronger-than-expected November ISM Non-manufacturing survey offset by an unexpected significant decline in October job openings-- and all resulting in yet another decline in 10-year Treasury yields.

Throughout November, markets increasingly factored in the possibility of the Federal Reserve implementing rate cuts next year. Despite a brief upward movement in yields on 10-year US Treasuries overnight, they have decreased by approximately 11 basis points by today’s Asia open, indicating a renewed expectation of less restrictive monetary policy in the coming year. 

Interestingly, the latest US data conveyed a somewhat Goldilocks message: economic growth appears satisfactory (as evidenced by the Services ISM), and there are indications that inflation may be poised to moderate further, given the ongoing rebalancing in the job market. Nevertheless, given the breadth of decline in broader indexes amid lower bond yields, some stock market operators seem to interpret the recent run of US economic data as not growth-friendly enough.

From our seat, the current US macroeconomic data indicates a scenario where, against expectations, inflation might return to the target without necessitating a deep recession and possibly without a recession at all. However, this week's labour market data balance could present a different narrative. Despite the favourable results for the soft landing camp via the Job Openings and Labor Turnover Survey (JOLTS) report, markets still lack high conviction.

The potential risk to the Santa rally doesn't hinge on a catastrophic event (despite elevated geopolitical tensions) or an abrupt negative turn in the economic data. Instead, it revolves around the simple exhaustion of the investment flows that propelled last month's historic surge. 

Additionally, there's a concern about the possibility that rate-cut pricing for 2024 might be overdone. It's worth noting that "overdone" implies the market may have gone too far in pricing in rate cuts, even if the pricing direction is not necessarily deemed misguided. 

While rate cuts next year are widely anticipated, the precise extent of these cuts remains uncertain. The magnitude of the cuts—whether they will be deep or, more importantly, relatively shallow—remains the most pressing question mark and is creating a lot of discord among cross-asset traders.

The key challenge lies in sustaining the positive momentum at a time of year when big institutional market moving desks are more concerned about holding on to their year-end bonuses rather than pressing the PnL envelope higher. Mind you, this feeds through on bull and bear purviews and buy and sell side desks alike.

Considering the significant up moves in November, I would speculate that traders might be more inclined to be more significant sellers in a market downdraft than buyers in a robust uptake if I were pressed to make a trading decision. 

Ultimately, generating a substantial sell-off in equities could prove challenging if bond yields persist in their decline. This trend may entrench until the data unmistakably indicates an economic recession rather than simply signalling disinflationary "cooling."

Still, no matter how rational expectations for rate cuts in 2024 might be (or at least might sound), those expectations can feed overshoots in asset prices. And that is where we are now with rate cut pricing possibly overdone, much of the available dry powder that hasn't found its way into 5 % yielding money market funds spent, and sentiment stretched.

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