The Chase is on!

Thoughts of the Day

The Fed maintained unchanged interest rates and expressed readiness to hike if necessary. However, they surprised the market by adding a word, “any”, to the statement.

Read what we think about the significance of this word and what the median policy rate of 4.6% in the Summary of Economic Projections implies for expected interest rate cuts next year in our report!
As we’ve been saying for a while, the Fed seems to be reaching the end of the hiking cycle, and this FOMC marks the official acknowledgment that rate cuts were under discussion.

This is an abridged version of our CIO’s daily writeup for the day, to view the full version, please login or subscribe to a membership plan.

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Day Ahead

Australia is expected to see 0.8k jobs added to its economy while the unemployment rate is expected to rise to 3.8% from 3.7%. 

The Swiss National Bank is expected to keep interest rates at 1.75%. 

The BoE is expected to keep interest rates at 5.25%. 

The ECB is expected to keep interest rates at 4.5%. 

US Retail Sales is expected to decline -0.1% Month-on-Monthly as it did in October.

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What Happened Yesterday

Market Movements as of New York Close 13 Dec 23
  • 61.5k jobs were added to the Australian economy (vs 11k expected) in November, down from 42.7k in October (revised from 55k). The unemployment rate rose to 3.9% from 3.8% (revised from 3.7%). The AUD spiked +0.46% against the USD from 0.6665 to 0.6695 in immediate reaction.
  • The US Producer Price Index showed that prices rose +0.9% YoY in November (vs+ 1% expected), down from +1.2% in October (revised from +1.3%). The core index showed that prices rose +2% (vs +2.2% expected) compared to +2.3% previously (revised down from +2.4%). The lower print confirms the fact that inflation is indeed coming in lower faster than expected. 
  • The Federal Reserve kept interest rates unchanged at 5.25%-5.5% in its policy meeting as expected. The central bank surprised the markets with their dot plot projections showing that most of the members of the committee expect at least three rate cuts (total -0.75%) in 2024. The reason for the change in policy stance was due to the fact that growth in economic activity has slowed from its strong pace in Q3 and that inflation has eased over the past year. Peak rates were also hinted as the policy statement mentioned that the extent of any further rate hikes will be contingent on the cumulative and lagged effects of past hikes. (Details of dot plots are in headline 3)
  • In his press conference, Powell continues to say that although inflation has cooled without a significant increase in unemployment, it remains too high and that ongoing progress in bringing it down is not assured and the path forward is uncertain. He admitted that the past hikes have slowed inflation and more lagged impacts are likely to be felt. He also noted that the Fed is prepared to tighten policy further if appropriate but that is unlikely given what current and projected economic conditions are. Finally, he added that the Federal Reserve is willing to cut rates even if the U.S. economy doesn’t dip into a recession in 2024 if inflation continues to fall. 
  • The US Treasury Yield curve inversion narrowed to 0.42% as the US 2-year bond yield sank -0.27% to 4.46% while the 10-year bond yield slid -0.16% to 4.04%.
  • The US stock futures were stuck within a range through the Asian and London trading hours ahead of the US Federal Reserve meeting yesterday.
  • The US stock market opened almost unchanged from Tuesday. Market continued to remain extremely quiet until the Federal Reserve meeting which sent the US stock market flying higher as the Federal Reserve indicated a change in policy stance. Consequently, the S&P 500 closed +1.37% higher (high: +1.42%, low: -0.01%), the Dow Jones leapt +1.40% (high: +1.41%, low: -0.15%) while the Nasdaq jumped +1.27% (high: +1.39%, low: +0.02%). The 3 indices closed at the highs of the year once again with the Dow Jones index closing at all-time highs while S&P500 and Nasdaq are both within striking distance of ATH. 
  • The optimism has continued as the Asian trading day starts with Nasdaq (+0.5%), S&P500 (+0.35%) and Dow Jones (+0.2%) futures continuing to grind higher. 
  • Optimism in the broader market spilled over into the crypto market as well with Bitcoin climbing +3.47% on the day and Ether rising +2.65%.
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Headlines & Market Impact

Fed’s Powell not ready to say when balance sheet wind-down end

Notable Snippet: Federal Reserve Chair Jerome Powell said on Wednesday that central bank officials have yet to decide when they will end their balance sheet reduction effort even as they are now actively contemplating interest rate cuts next year.

“We are not talking about altering the pace of Q.T. right now,” Powell said at his press conference following the Fed’s policy decision. Q.T. refers to quantitative tightening, or the contraction of the Fed’s bond-holdings.

Powell spoke after a Fed meeting that kept interest rates steady at between 5.25% and 5.5%, with officials pencilling in three quarters of a percentage points’ worth of cuts in the new year. The Fed, which targets 2% inflation, is weighing lower rates due to abating inflation pressures.

The Fed has been trimming its balance sheet since last year in an effort to complement rate hikes. The Fed has been shedding just shy of $100 billion per month in Treasury and mortgage securities, taking its holdings from just shy of $9 trillion in the summer of last year to $7.7 trillion now.

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Here’s why bringing down inflation has been different this time, according to Jerome Powell

Notable Snippet: Fed Chair Jerome Powell said Wednesday that the unique economic conditions created by the Covid-19 pandemic have helped the central bank’s effort to bring down inflation without causing a recession, a rare feat in economic history.

The Federal Reserve signalled in its latest economic projections that it will cut interest rates in 2024 even with the economy still growing, which would potentially be a path to the “soft landing” that many economists viewed sceptically when the central bank began aggressively hiking rates last year to fight post-pandemic inflation.

“This inflation was not the classic demand overload, pot-boiling over kind of inflation that we think about. It was a combination of very strong demand, without question, and unusual supply-side restrictions, both on the goods side but also on the labour side, because we had a [labour force] participation shock,” Powell said at a press conference after the Fed’s last meeting of the year.

The Fed has viewed its inflation fight as a two-front battle of trying to weaken the demand in the economy while the “vertical” supply curve normalised, Powell said. The supply side of various parts of the economy is now getting closer to where it was pre-pandemic, he said.

“Something like that has happened, happened so far. The question is once that part of it runs out — and we think it has a way to run… — at some point, you will run out of supply side help and then it gets down to demand, and it gets harder. That’s very possible, but to say with certainty that the last mile is going to be different, I’d be reluctant to say we have any certainty around that,” Powell said.

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Fed lowers inflation forecast for 2024, seeing core PCE falling to 2.4%

Notable Snippet: The Federal Reserve dialled back its inflation projections on Wednesday, seeing its favourite gauge falling to 2.4% in 2024.

The central bank also predicted that the core personal consumption expenditures price index will decline to 2.2% by 2025 and finally reach its 2% target in 2026. The gauge rose 3.5% in October on a year-over-year basis.

These new forecasts suggest a softer inflation picture in the next two years than that from the last update in September. The Fed had foreseen the core PCE hitting 2.6% in 2024 and 2.3% in 2025.

Committee members also upgraded their forecast for gross domestic product. They now expect GDP to grow at a 2.6% annualised pace in 2023, a half percentage point increase from the last update in September.

Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook. Projections for the unemployment rate were largely unchanged, at 3.8% in 2023 and rising to 4.1% in subsequent years.  

Projections released by the Fed showed the central bank would slash rates to a median 4.6% by the end of 2024, which would be three quarter-point reductions from the current targeted range between 5.25%-5.5%. 
[taken from another article]The committee’s “dot plot” of individual members’ expectations indicates another four cuts in 2025, or a full percentage point. Three more reductions in 2026 would take the fed funds rate down to between 2%-2.25%, close to the long-run outlook, though there was considerable dispersion in the estimates for the final two years.

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Phan Vee Leung
CIO & Founder, TrackRecord