What Will The Fed Say?

Thoughts of the Day

The US FED’s first meeting of the year is happening today. The market will be watching for indications of potential interest rate cuts. Despite signs of decreasing inflation, the Fed remains cautious, indicating the possibility of rate cuts later in the year but ready to hike if inflation stops heading towards 2% target. Data dependency will guide their policy decisions.

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Day Ahead

US ADP Employment Change is expected to show +135K jobs being added to the economy in January, down from 164k in December.

The Federal Reserve is expected to keep interest rates unchanged at 5.5%. Updates to the monetary policy stance especially with regards to discussions about possible interest rate cuts in the future are likely.

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What Happened Yesterday

Market Movements as of New York Close 30 Jan 24
  • The US JOLTS job openings data point showed that job openings rose to a 3-month high of 9.03M (vs 8.75Mexpected)  in December, increasing from 8.93M (revised from 8.79M) previously.
  • Australian Monthly CPI Indicator showed a year-on-year rise of 3.4% in December 2023, a decrease from the 4.3% recorded in November and falling short of the anticipated 3.7% by market analysts. This marked the third consecutive month of declining annual inflation rates, with the most recent figure being the lowest since November 2021. The AUD fell -0.14% against the USD from 0.6595 to 0.6595 as a result.
  • In January 2024, China’s official NBS Manufacturing PMI rose marginally to 49.2 (as expected) from the six-month low of 49.0 seen in December. This increase marked the fourth consecutive month of shrinking factory activity (a reading below 50 denotes contraction). Meanwhile, the official NBS Non-Manufacturing PMI for China increased slightly to 50.7 (vs 50.6 expected) in January 2024, up from December’s 50.4, surpassing market expectations marginally. This uptick represented the 13th consecutive month of growth in service sector activity, reaching its highest rate since the previous September.
  • The US Treasury Yield curve inversion widened to 0.30% as the US 2-year bond yield rose  +0.07% to 4.36% while the 10-year yield slipped -0.02% to 4.06%. The rise in the 2 year bond yield was mostly due to the stronger than expected jobs vacancy number that showed the resilience of the labour market. 
  • The US stock futures drifted slightly lower through the Asian and London trading sessions with the S&P 500 futures down -0.14% when the New York session began.
  • The US stock market opened slightly lower from Monday. It then traded sideways through the New York session. Consequently, the S&P 500 inched -0.06% lower (high: +0.06%, low: +0.24%), the Dow Jones gained +0.45% (high: +0.43%, low: -0.20%) while the Nasdaq slipped -0.68% (high: -0.10%, low: -0.87%).
  • Alphabet (GOOGL) fell -5.84% in extended trading after it reported advertising sales that came in below expectations ($65.5 billion vs $66.1 billion expected) and higher costs ($11 billion) to power its AI ambitions. Revenue: $86.3 billion vs $85.3 billion expected. Earnings: $1.64 vs $1.60 expected
  • Microsoft (MSFT) fell -0.23% in extended trading despite beating on earnings as the company forecast operating expenses of $15.8 billion to $15.9 billion in the current quarter, up from $15.4 billion in the previous one. Revenue: $62 billion vs $61.12 billion expected. Earnings: $2.93 vs $2.78 expected.
  • Advanced Micro Devices (AMD) fell -6.49% in extended trading as the company released forecasts that failed to meet expectations: For the current quarter, AMD executives forecast revenue of $5.4 billion, plus or minus $300 million, compared with analysts’ average estimate of $5.73 billion. Q4’23 Revenue: $6.17 billion vs $6.12 billion expected. Earnings: $0.77 as expected.
  • The crypto market traded in a narrow range on a day with no news and little market volatility. BTC inched down by -0.8% while ETH was up by 1.1%.
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Headlines & Market Impact

Citadel’s Ken Griffin says the economy looks ‘pretty damn good right now’

Notable Snippet: The market has managed to put behind the “economic anxiety” it faced as recently as the fourth quarter of 2023, according to Citadel CEO Ken Griffin. 

The hedge fund manager said Tuesday that a soft landing could happen this year, with recent data indicating a solid labour market, healthy GDP growth and inflation moderating at a better pace than expected. Inflation could even fall into the low 2% range by the end of 2024, Griffin noted.

“The [Federal Reserve] can start to cut rates come this summer, and we will see unemployment touch up a little bit. But the overall economy looks pretty damn good right now,” Griffin told CNBC’s Leslie Picker on Tuesday at the MFA Network event in Miami. “This is a real change in mindset from where we were September, October last year.”

However, Griffin noted that the current level of federal spending has created an economy that “feels really good right now,” but could come at a cost. “This government spending has got to get in check. It’s creating [a] bit of euphoria right now, but it will come with a hangover,” said Griffin. 

While the combination of cutting rates and high levels of government spending is inflationary, Griffin said the energy and food price shocks that occurred two years ago are now reversing, as well as a slight pullback in hiring. He thinks this has helped create an “easier environment” for the Fed to navigate in its battle against inflation.

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Euro zone economy narrowly skirts recession, stagnates in fourth quarter

Notable Snippet: The euro zone economy stabilised in the fourth quarter of 2023, flash figures published by the European Union’s statistics agency showed Tuesday.

The bloc narrowly avoided the shallow recession that was forecast in a Reuters poll of economists, following a 0.1% fall in gross domestic product in the third quarter.

The euro zone’s seasonally adjusted GDP was flat compared with the previous quarter and expanded by 0.1% versus the previous year. In a preliminary estimate, the euro area was seen posting 0.5% growth over the whole of 2023.

The European Commission’s euro zone sentiment indicator meanwhile showed a decline in consumer confidence — though the outlook for businesses in services and industrials was slightly brighter.

The euro zone economy is in a “phase of prolonged weakness” that is being driven by Germany, while southern European economies lead the way in growth, Bert Colijn, senior economist at ING, said in a note.

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Saudi Arabia orders Aramco to lower oil capacity target

Notable Snippet: Saudi Arabia’s government on Tuesday ordered state oil company Aramco (2222.SE) to halt its oil expansion plan and to target a maximum sustained production capacity of 12 million barrels per day (bpd), 1 million bpd below a target announced in 2020.

Saudi Arabia for decades has been the main holder of the world’s only significant spare oil capacity, providing a safety cushion for global supplies in case of major disruptions caused by conflict or natural disasters.

The kingdom is the world’s largest oil exporter and is pumping around 9 million bpd, well below its around 12 million bpd existing capacity after it cut production as part of an agreement with OPEC and its allies last year.

Saudi Arabia, the de facto leader of OPEC, and Russia have spearheaded efforts with allies in the OPEC+ producer group to cut output to balance markets in the face of rising supply from other big oil producers, such as the U.S.

“Aramco currently has spare capacity of 3 million bpd,” a source with direct knowledge of the matter told Reuters. That gives Aramco plenty of scope to increase output if the market needs the oil, the source added.

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Phan Vee Leung
CIO & Founder, TrackRecord