What did the Fed minutes say?

Thoughts of the Day

The minutes of the US Federal Reserve’s December policy meeting was released and it did not really tell us anything new. It confirmed that the Fed officials are indeed starting to talk about interest rate cuts and they said that it was likely to happen this year, but they remain cautious and may still hike interest rates further if inflation creeps higher. 

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Day Ahead

The US ADP Employment Change is expected to show 115K jobs being added to the economy in December compared to 103k previously.

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What Happened Yesterday

Market Movements as of New York Close 3 Jan 2023
  • Fedspeak:
    Barkin (current voter, slight hawk): The Fed is making real progress on inflation while the economy remains healthy and they can see the case for a soft landing developing in the data but noted that it was not ‘inevitable.’ He further explained that risks to soft landing include delayed impact of high interest rates on credit, outside shocks, services inflation getting stuck at a high level and demand remaining strong. That’s why the potential for additional rate hikes remains on the table. 
    (Barkin was on the neutral side previously but is starting to sound more dovish.)
  • The US JOLTs Job Openings showed that 8.79M jobs were available in the economy in December (vs 8.85M expected), down from 8.852M previously (revised from 8.733M). Given that it is the 3rd consecutive month of decrease, it shows that the labour market conditions are continuing to ease.
  • The US Treasury Yield curve inversion widened to 0.42% as the US 2-year bond yield remained at 4.33% while the 10-year bond yield fell -0.04% to 3.91%.
  • The US stock futures remained muted during the Asian trading hours but started to drift lower when the London session began. The S&P 500 futures were down -0.56% before the New York session started. Risk sentiment remained weak as tensions continue to ratchet higher in the Middle East with the assassination of a Hamas leader in the capital of Lebanon by a drone strike. (see headline 1 below)
  • The US stock market opened lower from Tuesday. It then attempted to climb higher on the back of the weaker than expected JOLTS data but ultimately failed. Another attempt to go higher was made after the release of the Fed minutes (headline 3) but it ultimately failed as well. Consequently, the S&P 500 closed -0.80% on the day (high: -0.29%, low: -0.91%), the Dow Jones slipped -0.76% (high: -0.23%, low: -0.83%) while the Nasdaq decreased -1.06% (high: -0.44%, low: -1.16%). 
  • The crypto market traded weak on the day following reports from Matrixport (all-in-one crypto financial services platform) that the U.S. Securities and Exchange Commission (SEC) is expected to reject all applications to list a spot bitcoin exchange-traded fund (ETF) this month. Bitcoin fell as low as 41,494 (-7.87%) before recovering some.
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Headlines & Market Impact

Hamas leader’s killing raises fears of wider war, Israel keeps up bombardment of Gaza

Notable Snippet: Israeli forces kept up their assault on the Gaza Strip on Wednesday and told civilians to leave a refugee camp in the north of the Palestinian enclave after the war reached into Lebanon with the killing in Beirut of the Hamas deputy leader.

Israel has neither confirmed nor denied that it killed Saleh al-Arouri in a drone strike in the Lebanese capital on Tuesday. But military spokesperson Rear Admiral Daniel Hagari said Israeli forces were in a high state of readiness and prepared for any scenario.

The assassination was a further sign that the nearly three-month war between Israel and Hamas was spreading across the region, drawing in the occupied West Bank, Hezbollah forces on the Lebanon-Israel border, and even Red Sea shipping lanes.

Arouri, 57, who lived in Beirut, was the first senior Hamas political leader to be assassinated since Israel began its offensive against the militant group in response to its deadly rampage into Israeli towns on Oct. 7.

Hamas politburo member Hossam Badran said in a eulogy for Arouri: “We say to the criminal occupation (Israel) that the battle between us is open.”

Israel had long accused him of orchestrating attacks on its citizens. But a Hamas official said he was also “at the heart of negotiations” conducted by Qatar and Egypt over the outcome of the Gaza war and the release of Hamas-held Israeli hostages.

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Oil prices rise more than 3% on mounting Middle East tensions, OPEC pledge to support market

Notable Snippet: Oil rose more than 3% on Wednesday as tensions mount in the Middle East and OPEC pledges to remain united in supporting prices.

The West Texas Intermediate contract for February gained $2.41, or 3.5%, to trade at $72.84. The Brent contract for March added $2.47, or 3.25%, to trade at $78.36.

Houthi militants, who are based in Yemen and backed by Iran, claimed Wednesday that they targeted the CMA CGM Tage container ship. French shipping giant CMA CGM told CNBC in a statement that the vessel “did not suffer any incident.”

This comes a day after Danish shipping giant Maersk halted all shipping through the Red Sea until further notice due to repeated Houthi attacks on vessels.

Protests in Libya have also shut down the Sharara oilfield, which produces 300,000 barrels per day, two engineers told Reuters on Wednesday.

OPEC and its allies issued a statement Wednesday pledging to remain united in the group’s “efforts to maintain oil market stability going forward.” Several members of the group pledged in November to cut 2.2 million barrels per day through the first quarter of this year to support prices.

Traders have been sceptical of that pledge because it is voluntary and OPEC has struggled to maintain a united front. The promised voluntary cuts have done little to support prices as the U.S. pumps crude at a record clip and demand weakens in China.

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Fed officials in December saw rate cuts likely, but path highly uncertain, minutes show

Notable Snippet: Federal Reserve officials in December concluded that interest rate cuts are likely in 2024, though they appeared to provide little in the way of when that might occur, according to minutes from the meeting released Wednesday.

However, the minutes noted an “unusually elevated degree of uncertainty” about the policy path. Several members said it might be necessary to keep the funds rate at an elevated level if inflation doesn’t cooperate, and others noted the potential for additional hikes depending on how conditions evolve.

“Participants generally stressed the importance of maintaining a careful and data-dependent approach to making monetary policy decisions and reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee’s objective,” the minutes stated.

The minutes indicated that “clear progress” had been made against inflation, with a six-month measure of personal consumption expenditures even indicating that the inflation rate has edged below the Fed’s 2% target.

However, the document also noted that progress has been “uneven” across sectors, with energy and core goods moving lower but core services still moving higher.

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord