The market is not believing the Fed

Thoughts of the Day

Despite stronger-than-expected US economic growth (+5.2% vs. EXP 5.0%) and a hawkish stance from Federal Reserve’s Barkin, US bond yields continue to decline. The market still believes that we have seen the last interest rate hike, and prices a near 50% probability of a rate cut in March. If the PCE Price Index undershoots expectations later today, confidence in an early 2024 rate cut will grow.

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Day Ahead

The OPEC+ will meet to discuss any changes to output levels in oil production.

The US PCE Price Index is expected to show that prices rose +3.1% Year-on-Year in October compared to +3.4% in September. The core index is expected to show an increase of +3.5%, a tad lower than +3.7% in September.

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What Happened Yesterday

Market Movements as of New York Close 29 Nov 23
  • Fedspeak:
    Barkin (2024 voter, slight hawk): He is unwilling to take another interest rate hike off the table. He believes that inflation will be more stubborn than what they would like. In an interview on CNBC, he considered that talks about rate cuts are premature. 

(Barkin remains on the hawkish side)

  • The US Treasury Yield curve inversion narrowed to 0.37% as the US 2-year bond yield and the US 10-year bond yield fell -0.09 and -0.05%% to 4.64% and 4.27% respectively. US bond yields remain soft despite Barkin’s hawkish comments.
  • The US stock futures traded sideways through the Asian trading session. It then started to trade higher during the London trading session with the S&P 500 futures rising +0.45% before the New York session began.
  • The US stock market opened higher from Tuesday. It then traded higher on optimism from the US GDP growth data which came in higher than expected (See headline 2). However, hawkish comments from Federal Reserve official Barkin weighed on risk sentiment through the rest of the session. Consequently, the S&P 500 closed -0.09% lower (high: +0.72%, low: -0.17%), the Dow Jones inched higher by +0.04% (high: +0.46%, low: -0.03%) while the Nasdaq fell -0.14% (high: +0.97%, low: -0.21%).
  • The crypto market had a quiet trading day with Bitcoin up merely +0.1% and Ether down -0.96%.
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Headlines & Market Impact

China factory activity unexpectedly weakens for a second straight month

Notable Snippet: China’s factory activity shrank for a second straight month in November, signalling that the world’s second-largest economy is not yet out of the woods and may require more muscular policy support.

The official manufacturing purchasing managers’ index fell slightly to 49.4 in November from 49.5 in October, according to data from the National Bureau of Statistics released Thursday. This was slightly worse than the median forecast for 49.7 in a Reuters poll.

A PMI reading above 50 indicates expansion in activity, while a reading below that level points to a contraction.

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US economy grows 5.2% in third quarter; higher interest rates eroding momentum

Notable Snippet: The U.S. economy grew faster than initially thought in the third quarter as businesses built more warehouses and accumulated machinery equipment, but momentum appears to have since waned as higher borrowing costs curb hiring and spending.

The growth pace, which was the quickest in nearly two years, however, likely exaggerated the health of the economy last quarter. When measured from the income side, economic activity increased at a moderate pace. Nevertheless, the report from the Commerce Department on Wednesday indicated the economy continued to grow despite fears of a recession that have persisted since late 2022.

Gross domestic product increased at a 5.2% annualised rate last quarter, revised up from the previously reported 4.9% pace, the Commerce Department’s Bureau of Economic Analysis (BEA) said in its second estimate of third-quarter GDP. It was the fastest pace of expansion since the fourth quarter of 2021.

Economists polled by Reuters had expected GDP growth would be revised up to a 5.0% rate. The economy grew at a 2.1% pace in the April-June quarter and is expanding at a pace well above what Federal Reserve officials regard as the non-inflationary growth rate of around 1.8%.

The upward revision to growth reflected upgrades to business investment on structures, mostly warehouses and healthcare facilities. Spending by state and local governments was also revised higher. Residential investment was also raised, thanks to the construction of more single-family homes, helping to end nine straight quarters of contraction.

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Australia walks a tight rope on trade with China as security concerns mount

Notable Snippet: Australia’s relationship with China remains fractious even as the country seeks to mend ties with its largest trading partner.

The previous Australian government’s support for an international inquiry into China’s handling of the coronavirus had invited crippling export curbs from Beijing — something from which Australia is yet to recover from.

While trade compulsions have forced the Asia-Pacific nation to reach out to China, security concerns over Beijing’s South China Sea claims have prevented a reset in ties.

China, however, realises the need to bring Australia into its fold.

“China views Australia as the touchstone American ally of the Indo-Pacific. Whichever direction Australia turns in the U.S.-China competition, other less ironclad U.S. partners and friends often follow,” said Wen-Ti Sung, a non-resident fellow at American think tank Atlantic Council’s Global China Hub.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord