Coming off a rebound last week, markets started the shortened trading week on a more uneven footing. Bond yields rose and stocks fell on thoughts that anticipation of Fed cuts have gone too far. This morning, Fed Governor Christopher Waller appeared to push back on market expectations of 6 rate cuts in 2024 with less dovish commentary than expected. “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past,” he noted.

This week marks the official start of earnings season as many major banks began reporting. Overall, many earnings estimates have been cut over the past quarter, with strategists expecting most companies to beat forecasts this season.

Internally, we are seeing a divergence in the market as breadth is deteriorating from overbought levels. Newton scores are showing improvement in Large Caps compared to their smaller cap counterparts after the slight rotation over the last few weeks. On the fixed income side, we are seeing more strength out of the short end of the curve as the 10-year Treasury has climbed slightly past 4%. Beneath the surface, Health Care and Communications are on top again, with Health Care losing momentum built up over the last two weeks. Energy and Materials are the laggards.

In economic news, there is an abundance of Fed speak this week. After the Waller speech today, investors will be looking for any hawkish tone in speeches to reset expectations on rate cuts for the year. The Fed has left the policy rate in the current range of 5.25% to 5.5% since July. Although the Fed has projected roughly 3 cuts in 2024, markets are pricing double that. If the economy continues to hold up and surprise to the upside as it did in 2023, the market could pare those expectations back. The goal of the Fed is still bringing inflation back to its 2% target while keeping employment near its maximum level.