Game On, Says the Fed

Thoughts of the Day

The US Fed maintained its stance despite the recent disappointing inflation data, sticking to projections of 3 interest rate cuts this year. The policy statement barely changed, with the Fed remaining in a wait-and-see, highly data-dependent mode. During the press conference, the Fed Chair essentially said, “Game On!” The stock market responded with a 1% rally and continues to trade higher in the Asian timezone.

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Day Ahead

The Bank of England is expected to keep interest rates unchanged at 5.25%.

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What Happened Yesterday

Market Movements as of New York Close 20 Mar 24

The inflation rate in the United Kingdom decreased to +3.4% on an annual basis in February (vs +3.5% expected), a drop from the +4% seen in January and December. This marked the lowest inflation rate since September 2021. The annual core inflation rate in the UK, which excludes volatile items, was +4.5% in February (vs +4.6% expected), achieving its lowest point since January 2022, down from +5.1% observed in the preceding three months. The GBP attempted to depreciate against the USD due to the weak CPI print, falling just -0.11% from 1.2713 to 1.2698 before swiftly recovering +0.18% to the 1.2718 level.

The Federal Reserve maintained the fed funds rate at a 23-year peak of between 5.25% and 5.5% for the fifth straight meeting as expected. The Fed still expects to reduce interest rates three times within the year as it did in the December quarterly forecasts. The outlook suggests 3 rate cuts for 2025, one less than previously forecasted in December, and an additional 3 cuts anticipated for 2026. 

Economic projections show an uptick in US GDP growth expectations for 2024 (+2.1% vs  +1.4%),2025 (+2% vs  +1.8%) and 2026 (+2% vs  +1.9%). Inflation expectations, as measured by the PCE, remain steady for 2024 at 2.4%, with a slight increase anticipated for 2025 (+2.2% vs  +2.1%). The core inflation rate is expected to rise in 2024 (+2.6% vs  +2.4%) but will hold steady in 2025 at +2.2%. Unemployment rates are projected to be slightly lower in 2024 (+4% vs  +4.1%) than previously thought, with no change in the forecast for 2025 at +4.1%. The Fed statement was barely changed and noted that job gains have remained strong over the past year.

In his press conference, Powell was surprisingly dovish because he stressed that they were not spooked by recent inflation prints that were higher than expected and reiterated that the disinflation process is continuing with the bumps in the path as they predicted. He also added that continued strength in the labour market would not be a reason to hold off lowering interest rates and unexpected weakening in the labour market could also warrant a policy response. Additionally, he noted that the Fed is discussing slowing the pace of balance sheet runoff as it would reduce the risk of causing a shock to the system. Risk assets rallied strongly as a result of his dovish message. 

The US Treasury Yield curve inversion narrowed to 0.32% as the US 2-year bond yield fell -0.09% to 4.59% while the 10-year yield decreased -0.03% to 4.27%. 

The US stock futures stayed within a range during the Asian and London trading sessions ahead of the Federal Reserve meeting.

The US stock market opened almost unchanged from Tuesday. It then held steady until the results of the Fed meeting. The Fed projections of 3 rate cuts (market was fearing that they would change it to just 2) this year then boosted risk sentiment, allowing the stock market to go higher. As a result, the S&P 500 rose +0.89% (high: +0.93%, low: -0.13%), the Dow Jones increased +1.03% (high: +1.07%, low: -0.31%) while the Nasdaq popped +1.15% (high: +1.20%, low: -0.16%).

The crypto market was boosted by the improvement in risk sentiment as well with Bitcoin up +9.7% and Ether up +11.4%.
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Headlines & Market Impact

Fed raises GDP and inflation outlook, while keeping rate cut forecast

Notable Snippet: Federal Reserve members still see three interest rate cuts in 2024 despite an improving outlook for economic growth.

The Federal Open Market Committee’s March projections for rate cuts, or the so-called “dot plot,” shows a median Federal funds rate of 4.6% in 2024. With the current fed funds rate in a range of 5.25% to 5.50%, the dot plot implies three cuts of 0.25 percentage point each.

Fed Chair Jerome Powell said in his news conference Wednesday that the central bank wasn’t completely dismissing the recent inflation reports, though he did say that the January data may have been distorted by seasonal factors.

“I take the two of them together, and I think they haven’t really changed the overall story, which is that of inflation moving down gradually, on a sometimes bumpy road, toward 2%,” Powell said.

There were some smaller changes within the dot plot. In December, there was a bigger split among individual Fed members, with two FOMC voters indicating zero cuts in 2024 and another seeing six reductions. The most aggressive prediction now, in the March projections, has been dialled back to just four cuts.Additionally, the median projection for the fed funds rate in 2025 rose to 3.9% from 3.6%, implying one less cut. The long-run projection for that benchmark rate ticked up to 2.6% from 2.5%.

“We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year,” Powell said at his post-meeting news conference. “We are prepared to maintain the current target range for the federal funds rate for longer if appropriate.”

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European Central Bank’s Lagarde signals June cut but says future rate path uncertain

Notable Snippet: “By June we will have a new set of projections that will confirm whether the inflation path we foresaw in our March forecast remains valid,” Lagarde said in a speech in Frankfurt.

The June meeting has been flagged as a potential turning point by many members of the ECB’s Governing Council — which votes on rate moves — as it will be the first gathering for which data from spring wage negotiations will be available. The ECB is on alert for potential knock-on inflationary effects from rising salaries.

Data available by June will also provide more insight into the path of underlying inflation and the direction of the labour market, according to Lagarde.

“If these data reveal a sufficient degree of alignment between the path of underlying inflation and our projections, and assuming transmission remains strong, we will be able to move into the dialling back phase of our policy cycle and make policy less restrictive,” she said.

“But thereafter, domestic price pressures will still be visible. We expect services inflation, for example, to remain elevated for most of this year. So, there will be a period ahead where we need to confirm on an ongoing basis that the incoming data supports our inflation outlook.”

“Unlike in the earlier phases of our policy cycle, there are reasons to believe that the expected disinflationary path will continue,” Lagarde said, stressing confidence in the latest set of staff macroeconomic projections, which see inflation averaging 2.3% in 2024, 2% in 2025, and 1.9% in 2026.

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Intel awarded up to $8.5 billion in CHIPS Act grants, with billions more in loans available

Notable Snippet: The White House said Intel has been awarded up to $8.5 billion in CHIPS Act funding, as the Biden administration ramps up its effort to bring semiconductor manufacturing to U.S. soil.

Intel could receive an additional $11 billion in loans from the CHIPS and Science Act, which was passed in 2022. The awards will be announced by President Joe Biden in Arizona on Wednesday.

The money will help “leading-edge semiconductors made in the United States” keep “America in the driver’s seat of innovation,” U.S. Secretary of Commerce Gina Raimondo said on a call with reporters. Intel and the White House said their agreement is nonbinding and preliminary and could change.

Even with its slide relative to its peers, Intel is uniquely situated in the industry because it operates chip factories, or fabs, in addition to designing processors. AMD and Nvidia, are fabless, which means they design the chip, then send computer files and staff to Taiwan’s TSMC

 for the manufacturing of the device.

Intel said it would spend its CHIPS Act funds on fabs and research centres in Arizona, Ohio, New Mexico and Oregon. The company previously announced plans to spend $100 billion on U.S. programs and facilities. Intel has announced a plan to catch up in leading-edge manufacturing by 2026.

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Phan Vee Leung
CIO & Founder, TrackRecord