The market is not really listening to the Fed

Thoughts of the Day

US FED official Goolsbee expressed confusion over the market’s reaction to the Fed’s decision, and economic projections published last week. He emphasized they aren’t currently discussing rate cuts. Despite the Fed’s projection of three cuts, the market expects nearly six, reflecting concerns about the path of inflation.

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Day Ahead

The Canadian Consumer Price Index is expected to show that prices rose +2.9% in November, down from +3.1% in October.

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What Happened Yesterday

Market Movements as of New York Close 19 Dec 23
  • Fedspeak:
    Daly (2024 voter, centrist):
    “Interest rate cuts could be needed in 2024 to prevent over-tightening. More rate cuts could be appropriate if inflation falls faster and that fewer cuts would be warranted if progress in inflation stalls.”
    Mester (2024 voter, slight hawk): “The next phase is not when to reduce rates, even though that’s where the markets are at. The next phase will be about how long monetary policy needs to remain restrictive.”
    Goolsbee (nonvoter in 2024, known dove): “If we keep getting improvements on the supply side and improvements in labour force participation, then the economy doesn’t have to weaken for inflation to come down.”
    (Daly and Gooldsbee are still as dovish, Mester slightly less hawkish. )
  • The Bank of Japan kept interest rates unchanged in the policy meeting. The central bank pointed out in its policy statement that it will not hesitate to take additional easing if necessary to maintain the stability of financing for firms. Additionally, the central bank noted that while inflation is projected to remain above 2% through the 2024 fiscal year, there are expectations of a deceleration thereafter. The USD spiked +0.74% against the JPY following the policy decision.
  • RBA monetary policy minutes: The central bank considered between a +0.25% hike or a pause but ultimately settled for a pause as the Board saw “encouraging signs” of progress on inflation and the risk that inflation could stay high for too long was balanced by the risk of a sharper slowdown in demand. “Consumption growth is quite weak, many households facing a painful squeeze on finances.” Hence, the Board saw value in waiting for more data to assess the balance of risks. The AUD rose +0.14% against the USD following the release of the meeting minutes.
  • The US Treasury Yield curve inversion narrowed to 0.48% as the US 2-year bond yield fell -0.01% to 4.43% while the 10-year bond yield rose +0.04% to 3.95%.
  • The US stock futures traded within a range during the Asian trading hours. However, momentum started to pick up in the London trading hours with the S&P 500 futures up +0.24% before the New York trading session started
  • The US stock market opened higher from Friday. It then continued to make its way higher. Consequently, the S&P 500 rose +0.45% on the day (high: +0.64%, low: +0.14%), the Dow Jones was almost unchanged (high: +0.24%, low: -0.05%) while the Nasdaq rose +0.64% (high: +0.85%, low: +0.04%).
  • However, after market hours, there was a drop in Nasdaq futures (-0.28%) and S&P 500 futures (-0.21%) with no obvious reasons. 
  • The crypto market climbed higher on the back of little news, Bitcoin is up +3.09% while Ether is up +1.06%.
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Headlines & Market Impact

Fed’s Goolsbee says he was ‘confused’ by last week’s market reaction

Notable Snippet: A Federal Reserve official said Monday that the market may have misunderstood the central bank’s intended message last week after stocks and bonds rallied sharply.

“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” said Chicago Fed President Austan Goolsbee said on CNBC’s “Squawk Box.” “I was confused a bit — was the market just imputing, here’s what we want them to be saying?”

The Fed president also pushed back against the idea that the Fed is actively planning on a series of rate cuts.

“We don’t debate specific policies, speculatively, about the future. We vote on that meeting,” he said.

Goolsbee did not explicitly say that the market pricing was wrong, but did highlight this difference.

“The market expectation of the number of rate cuts is greater than what the SEP projection is,” Goolsbee said.

Goolsbee is not the only Fed official who has downplayed the meeting in the wake of the market rally. New York Fed President John Williams said on CNBC’s “Squawk Box” on Friday that “we aren’t really talking about rate cuts right now.”

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Seven European countries pledge CO2-free power systems by 2035

Notable Snippet: Seven countries including Germany, the Netherlands and France pledged on Monday to eliminate CO2-emitting power plants from their electricity systems by 2035.

Taken together, the countries account for nearly half of EU power production – largely thanks to the contributions from Germany and France, Europe’s two biggest power producers.

The aim was set by EU members Austria, Belgium, France, Germany, Luxembourg and the Netherlands and non-EU Switzerland, which aligns itself with some EU climate policies.

In a joint statement, the countries said existing EU climate measures are likely to steer Europe towards a nearly CO2-free power sector by 2040.

Agreeing to move faster together, the countries said, would help them jointly plan infrastructure to make sure they build enough grids and energy storage to integrate large amounts of low-carbon power into the network and keep it flowing across country borders.

“The countries have a strongly interconnected electricity system, and can benefit from offshore potential in some areas and storage in other areas,” the Netherlands’ caretaker energy minister Rob Jetten said.

Overall, the EU got 41% of its electricity from renewable sources in 2022, European Environment Agency data show.

Modelling by think-tank Ember has said it would be possible for all of Europe to nearly decarbonise its power sector by 2035, with wind and solar producing up to 80% of electricity by that date, and coal and gas power largely eliminated.

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US court approves order for Binance to pay $2.7 bln to CFTC

Notable Snippet: A U.S. court entered an order against crypto exchange Binance and its former CEO, Changpeng Zhao, approving billions of dollars in fines for money laundering following a case brought by the U.S. Commodity Futures Trading Commission, the agency said on Monday.

Zhao will pay $150 million and Binance will pay $2.7 billion to the CFTC as a result, the agency said in a statement.

The U.S. District Court for the Northern District of Illinois approved the previously announced settlement and entered a consent order of permanent injunction, civil monetary penalty, and equitable relief against Zhao and Binance, the CFTC said in its statement. The settlement was reached in late November.

The court imposed a $150 million civil monetary penalty personally against Zhao, and required Binance to disgorge $1.35 billion of ill-gotten transaction fees and pay a $1.35 billion penalty to the CFTC, according to the agency.

In November, Zhao stepped down and pleaded guilty to breaking U.S. anti-money laundering laws as part of a settlement resolving a years-long probe into the world’s largest crypto exchange.

At the time, Binance said the resolutions acknowledged the company’s responsibility “for historical, criminal compliance violations, and allow our company to turn the page.”

Binance broke U.S. anti-money laundering and sanctions laws and failed to report more than 100,000 suspicious transactions with organisations the U.S. described as terrorist groups, authorities have said.

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Phan Vee Leung
CIO & Founder, TrackRecord