Other central bankers remain stubborn

Thoughts of the Day

Despite the US Federal Reserve’s shift, the Swiss National Bank, Bank of England, and European Central Bank remain hawkish & they stand ready to hike rates if needed. They are worrying about enemies of the past and rarely see what comes beyond the horizon. Expect them to stick to this refrain till it becomes patently clear that the enemy that lies ahead is disinflation.

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What Happened Yesterday

Market Movements as of New York Close 14 Dec 23
  • The Swiss National Bank kept interest rates at 1.75% for the second consecutive meeting as it cites lower inflation pressures. However, policymakers noted that uncertainty remains high and will continue to monitor the development of inflation closely, and will adjust its monetary policy if necessary to ensure that inflation remains tamed. The USD fell -0.27% against the CHF in immediate reaction and finished the day -0.48% lower.
  • The BoE kept interest rates at 5.25% as expected for the 3rd consecutive time with a 6-3 vote of which the dissenters opted for another +0.25% hike. The central bank highlighted the need to keep interest rates high to combat inflation and that there may still be a need to hike further if inflation remains high. The GBP rallied +0.43% against the USD immediately and closed the day +1.17% higher.
  • The ECB kept interest rates at 4.5% as expected for the second consecutive time in order to fight inflation. The ECB also said full reinvestment under the PEPP will end on June 30 and the portfolio will then fall by €7.5 billion per month until the end of 2024. ECB President Lagarde also said that policymakers did not discuss any rate cuts, reiterating that future decisions would be data-dependent. The EUR appreciated +0.16% against the USD following the decision and finished +1.09% higher against the USD.
  • US Retail Sales rose +0.3% Month-on-Month against expectations of a -0.1% decline, up from -0.2% in October (revised from -0.1%). Retail Sales in the United States increased +4.1% Year-on-Year in November 2023, the strongest annual growth since February, compared to a +2.2% gain in October (revised down from +2.5%). The S&P 500 futures climbed +0.16% following the release of the data.
  • The US Treasury Yield curve inversion widened to 0.45% as the US 2-year bond yield fell -0.09% to 4.37% while the 10-year bond yield slid -0.12% to 3.92%.
  • The strong momentum of the rally after the US Federal Reserve decision from the previous day pushed the US stock futures higher during the Asian and London trading sessions with the S&P 500 futures up +0.38% before the New York session began.
  • The US stock market opened higher from Wednesday. The market remained at elevated levels until the release of the 15-Year Mortgage Rate, which rose to 6.38% from 6.29%, despite the Fed’s change in policy stance the day prior. The higher mortgage rates then sent stock indices down slightly. Additionally, comments from former Dallas Federal Reserve President Robert Kaplan could have sent markets down slightly as well as he cautioned against overreacting to the recent dovishness of the Fed, saying it was bound to happen. Consequently, the S&P 500 closed +0.26% higher (high: +0.67%, low: -0.27%), the Dow Jones rose +0.43% (high: +0.53%, low: -0.10%) while the Nasdaq dipped -0.15% (high: +0.59%, low: -0.86%). 
  • The crypto market remains on the bullish side with Bitcoin up +0.2% and Ether up +2.43%.
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Headlines & Market Impact

‘Bonds are back’ as markets enter a ‘new paradigm,’ says HSBC Asset Management

Notable Snippet: Markets have entered a “new paradigm” as the global order fragments, while heightened recession risk means that “bonds are back,” according to HSBC Asset Management.

In its 2024 investment outlook, seen by CNBC, the British lender’s asset management division said that tight monetary and credit conditions have created a “problem of interest” for global economies, increasing the risk of an adverse growth shock next year that markets “may not be fully prepared for.”

HSBC Asset Management expects U.S. inflation to fall to the Federal Reserve’s 2% target in late 2024 or in early 2025, with the headline consumer price index figures of other major economies also set to drop to central banks’ targets over the course of next year.

The bank’s analysts expect the Fed to begin cutting rates in the second quarter of 2024 and to trim by more than the 100 basis points priced in by markets over the remainder of the year. They also anticipate that the European Central Bank will follow the Fed, and that the Bank of England will kickstart a cutting cycle but will lag behind its peers.

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Intel unveils new AI chip to compete with Nvidia and AMD

Notable Snippet: Intel unveiled new computer chips on Thursday, including Gaudi3, an artificial intelligence chip for generative AI software. Gaudi3 will launch next year and will compete with rival chips from Nvidia and AMD that power big and power-hungry AI models.

While the company was light on details, Gaudi3 will compete with Nvidia’s H100, the main choice among companies that build huge farms of the chips to power AI applications, and AMD’s forthcoming MI300X, when it starts shipping to customers in 2024.

Intel has been building Gaudi chips since 2019, when it bought a chip developer called Habana Labs.

“We’ve been seeing the excitement with generative AI, the star of the show for 2023,” Intel CEO Pat Gelsinger said at a launch event in New York where he announced Gaudi3 along other chips focused on AI applications.

Intel also announced Core Ultra chips, designed for Windows laptops and PCs, and new fifth-generation Xeon server chips. Both include a specialised AI part called an NPU that can be used to run AI programs faster.

It’s the latest sign that traditional processor makers, including Intel rivals AMD and Qualcomm, are reorienting their product lines around and alerting investors to the possibility of AI models leading to surging demand for their chips.

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Fed stands alone as ECB, BoE insist ‘higher for longer’ still needed

Notable Snippet: Major European central banks on Thursday stuck with plans to keep their policy interest rates higher for longer to fight inflation that is proving stickier in some parts of the world than others, dashing any hope that a U.S. Federal Reserve pivot towards interest rate cuts marked a global turning point.

Extending the hawkish stance that has dominated global central banking for two years the Bank of England said in a statement that the Bank Rate would remain high for “an extended period,” while the European Central Bank said the euro zone’s benchmark rates would remain “at sufficiently restrictive levels for as long as necessary.”

Both the BoE and ECB kept their policy rates steady. But the language of their decisions contrasted with that of Fed Chair Jerome Powell who, after a policy meeting at which the U.S. central bank also remained on hold, gave the Fed’s decision a dovish tilt.

Though price pressures were easing, the ECB said it expected a near-term increase in inflation, and ECB President Christine Lagarde in her press conference said some components of inflation had not budged.

“We did not discuss rate cuts at all,” she said. “No discussion. No debate…Between hike and cut there is a whole plateau.”

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Phan Vee Leung
CIO & Founder, TrackRecord