🐂 Folks, here’s something you don’t see every day: A bull was spotted on the tracks of Newark, New Jersey, just outside of the Big Apple, only a few miles from the Charging Bull in NYC’s Financial District.

If that isn’t the sign of a bull market underway, we don’t know what it is. Or maybe it signals the bull market’s peak — you can bend ol’ fashioned superstition either way.

💭 Who knows, though. Markets have defied expectations for much of this year, as the S&P 500 sits 1% from its record high.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• The Fed’s shrinking balance sheet

• Citigroup shutters municipal bond business

• Falling prices provide early gifts to shoppers

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

Context: After the Federal Reserve opted not to raise interest rates again this week and projected three rounds of rate cuts in 2024, measures of financial conditions “eased.”

The index factors in many things, from short-term interest rates to currency value, stock prices, implied volatility in options, the premiums companies have to pay for financing versus the government (spreads), and more.

A lower, “easing” index value here reflects generally that it’s easier for individuals and companies to access needed capital.

IN THE NEWS

🛑 Fed’s Shrinking Balance Sheet Worries Key Corner of Markets

We don’t intend to put a damper on the weekend or distract from the market rally since the Federal Reserve shifted to loose monetary policy.

But we must address a key corner of markets: Because the Fed’s balance sheet reduction will continue as planned, there's a growing debate about whether the Fed is off the mark on how much it can shrink its balance sheet.

Tighten up: Shrinking its balance sheet is part of the quantitative tightening process (the opposite of quantitative easing, which became a pandemic-era financial buzzword). 

• But it’s walking a fine line of shrinking the balance sheet without driving dislocations in places like the repurchase-agreement markets or “repo” market, which concerns short-term borrowing for government securities — what some call the ‘plumbing of the financial system.’
  

• Flashbacks to September 2019? That’s when stresses in repurchase-agreement markets caused a benchmark rate to hit all-time highs, prompting the central bank to intervene.
  

• This week’s disruptions aren’t that extreme, but it reflects the delicate balance for Jerome Powell and Co. 

Financial grease: As Bloomberg framed the whole situation: “Four years ago, increased government borrowing exacerbated a shortage of bank reserves that was created when the Fed cut back on Treasury purchases. Now, reserves — the financial “grease” that ensures markets don’t seize up and send rates soaring — and the level at which they become scarce is again in question.”

Also of note: Powell’s commentary Wednesday sent stocks upward and pushed the 10-year U.S. yield below 4%.

Why it matters:

It’s worth keeping an eye on this after Powell indicated this week that he’s comfortable with the level of reserves. He said the Fed could halt balance-sheet reductions to ensure it remains “somewhat above” the Fed’s “ample” level, which is unknown. 

• “I would be pretty humble because we don’t know,” said former Fed Governor Jeremy Stein. “Before you bump into the wall, it’s very hard to gauge, rather than trying to reassure people we know what we’re doing and can play it pretty close.”
  

• Recall that the central bank wants to shrink its balance sheet (aka “QT”) to the smallest level without derailing its long-term policy goals. 

Read more

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😳 Citigroup to Shutter its Municipal Bond Biz

State and city governments borrow billions annually, issuing bonds to secure needed funding. Investing in these “municipal bonds” is a popular strategy with attractive tax exemptions for some.

And Wall Street has built big businesses out of underwriting these borrowings. One big player isn’t participating anymore, though: Citigroup.

• The pivot away from state and local debt is one of CEO Jane Fraser’s most significant moves yet to boost returns at the banking giant.
  

• In a memo, Citigroup said that underwriting municipal debt is “no longer viable given our commitment to increase the firm’s overall returns.”

New direction: The bank will wind down the division by the end of the first quarter, cutting about 100 banking and trading staffers. Once a juggernaut in the $4 trillion U.S. state and local debt market, Citi’s retreat signals a dramatic change in the bank’s strategy.

• Instead, it wants to be “the premier bank for large, multinational corporations,” according to Bloomberg.

Why it matters:

What went wrong: While Citi’s municipal debt division once helped rebuild the World Trade Center site, things have changed more recently.

• Texas politicians’ decision to blacklist the bank over its firearms policies hasn’t helped, especially since the state is the largest market for municipal debt issuance each year.

Big banks take a lot of heat, but they love to fall back on their role in helping local governments raise money when fending off political scrutiny.

• For example, in 2018, Citi held its annual shareholder meeting in Chicago, proudly highlighting how it was a key underwriter on bond deals for O’Hare International Airport. Those sorts of deals can build considerable political goodwill.
  

• But political goodwill is abstract; after years of missing profitability targets, CEO Jane Fraser is prioritizing tangible results.
  

• Of course, her hand was forced to some extent after several key personnel departures and failed appeals to Texas Governor Greg Abbott that it wasn’t violating state law and discriminating against the firearms industry.

Read more

MORE HEADLINES

✍️ Congress passes $886 billion defense bill, Biden to sign into law

🎅 How ugly Christmas sweaters took the holiday season by storm

✈️ The startup that wants to end turbulence on planes

⏰ Why some people are early risers, and some aren’t

☕️ China now has the most branded coffee shops in the world

💬 Mickey Mouse will enter the public domain on January 1st, 2024

🎄 Falling Prices Lift Shoppers’ Holiday Spirit

Bring on the lower prices, baby. Bring on the busy malls and crowded parking lots, too.

The New York Times reports that falling prices this year have driven lower prices for holiday gifts, lifting consumers’ spirits as they buy them.

The next two weekends are our last opportunities for holiday gifts, and consumers are expected to spend more than ever after enduring two years of rapid inflation. 

Is this for real? Yes. Toys are nearly 3% cheaper this year than last year, sports equipment is down 2%, and big-ticket items like washing machines cost 12% less than they did in 2022. 

• Eggs skyrocketed last winter, but they’ve fallen 22% over the past year.
  

• Consumer prices are still rising, but not nearly as quickly as in 2022. To be sure, groceries, restaurants, and haircuts are all more expensive today than last year.
  

• But consumers can rejoice knowing that the prices of certain physical goods have dipped. 

Downward pressure: Despite what some headlines might suggest, the economy is strong. There’s low unemployment and falling prices on many goods, which is driving a psychological lift. 

• For many who have grappled with inflation, even a slowdown in price increases is enough reason to celebrate.
  

• Traveling in the next two weeks to see family? The price of regular gas, which hit $5 a gallon in June 2022, has dropped to about $3 on average, per AAA.
  

• “We’re just kind of in the beginning of that phase, and we should continue to see downward pressure on prices in this category,” commented Mastercard’s chief economist.

Why it matters:

This is welcome news for consumers and economists alike as Fed officials try to put high inflation in the rearview mirror. 

Looking ahead: Consumers have been surprisingly resilient this year, transitioning from spending on home projects during the pandemic to services, including travel. 

• That leads many economists to believe that falling prices will only help the trend continue — or even accelerate through the holiday shopping season and well into next year. 

The last word: “Supply chains have basically normalized,” noted the head of economic research at Renaissance Macro. “Household demand behavior has basically normalized, the dollar is still pretty strong. I wouldn’t see a reason why goods prices would go higher.”

Read more (NYT)

QUICK POLL

Yesterday, we asked: Would you consider investing in music rights or youth sports companies?

— One reader wrote in to say, “Music is competing with more talent than ever before. From podcasts to stand-up comedy, movies, audiobooks, and other content you can stream or have on in the background. I feel like people are choosing to listen to other things these days.”

Adding, “As a parent, I can tell you that we will spend excess amounts of money on convenience and youth sports convenience seems like a no brainer. There is passion in this space and passionate customers tend to be more likely to pay a premium.”

— Another disagreed, saying simply: “Youth sports should not be incentivized by money.”

TOGETHER WITH THE ASSIST

Welcome to The Assist's 2023 Corporate Holiday Gift Guide! 🎁

Discover a handpicked collection of this season's hottest finds, ranging from cutting-edge tech to luxurious indulgences guaranteed to delight your team and clients.

🎉 With options for every budget, we've got your holiday shopping covered – consider it checked off your to-do list!

See you next time!

That's it for today on We Study Markets!

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