Holiday Season Sends a Gift: S&P 500 Near All-Time High

Rates little changed, equities rise as S&P 500 nears all-time high. As expected, swap rates and UST yields held within a tight range to start the holiday-shortened week, closing no more than 3bps from their opening levels. Major equity indices rallied, which saw the S&P 500 close just below its all-time high as rate cut bets continue to boost risk-on assets. The holidays are likely to thank: since 1969, the S&P 500 has averaged a gain of 1.3% over the last 5 trading sessions of the year.

Escalation risks mount in Middle East. The US launched strikes against targets in Iraq linked to an Iranian-backed terror group, according to a Pentagon announcement yesterday, after the group was connected to an attack that injured three US personnel. Then, Iranian-backed Houthi rebels responded today by launching strikes on Red Sea oil shipping, hitting a container ship en route to Pakistan. The US and other nations formed a naval task force to respond to Red Sea attacks, but oil prices continued to rise on the risk of further tensions, with WTI crude ending at over $75 per barrel. Commenting on the developments, Aaron Miller of the Carnegie Endowment for International Peace said, “Clearly, the longer the Israeli-Hamas war goes on with this sort of kinetic intensity, the more likely there would be some escalation.”

Argentinean inflation battle continues with less import restrictions. In the latest move of President Milei’s promised economic reforms, Argentina announced a curb of import restrictions. The prior system enabled the government with widespread authority in deciding what companies could import goods, which created “greater inflationary pressure and shortages”, according to Argentina Economy Minister Luis Caputo. The curbed restrictions should also contribute to the normalization of the overvalued peso, a continued effort from the 54% devaluation announced a few weeks ago.  

Japanese labor market remains strong. The Japanese jobs-to-applicants ratio eased slightly to 1.28 in November, while the unemployment rate held steady at 2.5%, according to data released today. Overall, the results signaled labor market strength and are expected to add pressure to Japanese employers to boost pay during wage negotiations with unions in the spring. The BOJ will be monitoring the developments closely as it searches for an inflationary wage-price cycle that could help support an end to negative rates and yield curve control.