What will the Fed say?

Thoughts of the Day

The US FED is likely to keep interest rates unchanged given the latest CPI data indicating inflation continues to moderate towards 2% target. Despite the clearer trend of decreasing inflation, the Fed will likely uphold a hawkish tone.

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Day Ahead

The US Producer Price Index is expected to show that prices rose +1% YoY in November, down from +1.3% in October. The core index is expected to show that prices rose +2.3% compared to +2.4% previously.

The Federal Reserve will likely keep interest rates at 5.5% in its policy meeting. Their comments on the future policy path will be key to risk sentiment.

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What Happened Yesterday

Market Movements as of New York Close 12 Dec 23
  • The UK Claimant Count Change came in at 16k for November (vs 15k expected), increasing from 8.9k in October. Market impact was limited.
  • The US Consumer Price Index (CPI) showed that prices rose +3.1% Year-on-Year in November as expected, a tad lower from +3.2% previously. The Month-on-month change for the headline inflation was slightly disappointing because it was +0.1% (previous 0%), a touch higher than the expected 0% but the core index was +0.3% MoM as expected (previous +0.2%). The core index showed that prices rose +4% in November as expected with no change from October. 
  • The US Treasury Yield curve inversion widened to 0.53% as the US 2-year bond yield rose +0.02% to 4.73% while  the 10-year bond yield fell -0.03% to 4.20%.
  • The US stock futures were contained within a range ahead of the release of the US CPI data. The S&P 500 futures than started trading higher (+0.27% on the day) in the mid London session as the data release approached but started to fall following the release of the CPI data (-0.37% from the highs) because of the slightly higher than expected print in the Month-on-Month change, resulting in a net loss of -0.10% before the New York session began.
  • The US stock market opened a tad lower from Monday. However, the pessimism did not last as it then powered higher as investors looked to the positives and focused on the fact that inflation is continuing to drop towards the Fed’s 2% target. Consequently, the S&P 500 closed +0.46% higher (high: +0.46%, low: -0.31%), the Dow Jones rose +0.48% (high: +0.53%, low: -0.09%) while the Nasdaq gained +0.82% (high: +0.82%, low: -0.29%). All 3 indices continue to close at the highs of the year.
  • The crypto market remains contained despite the CPI data in anticipation of the Federal Reserve policy meeting today. Bitcoin is up +0.55% while Ether is down -1.00%.
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Headlines & Market Impact

China vows to boost domestic demand in bid for 2024 recovery

Notable Snippet: China’s leaders vowed to boost domestic demand, prioritise the development of strategic sectors and tackle the country’s real estate crisis, following a key meeting that laid out economic priorities for the new year.

Under a new slogan pledging to achieve stability through economic progress, Chinese leaders said it’s necessary to overcome some difficulties and challenges, which include insufficient demand, overcapacity in some industries, weak social expectations and many hidden risks which still exist, according to a Tuesday evening broadcast on the state-owned China Central Television.

“China’s economy has achieved a recovery, with solid progress made in high-quality development in 2023,” Chinese leaders said, according to a brief readout of the two-day meeting published by state-owned Xinhua. “China still has to overcome some difficulties and challenges to further revive the economy.”

In a CCTV readout of the meeting, China’s leaders stressed that a focus on high quality development is key, prescribing a nine-point plan that included technological innovation in the industrial system, boosting domestic consumption, expanding high-level foreign investment and revitalising agriculture to boost food security.

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U.S. crude oil falls nearly 4% as traders worry about inflation affecting demand

Notable Snippet: The West Texas Intermediate contract for January lost $2.71, or 3.80%, to settle at $68.61 a barrel. The Brent contract for February shed $2.79, or 3.67%, to settle at $73.24 a barrel.

While U.S. stocks shrugged off the latest inflation data, the oil markets saw cause for concern. The consumer price index edged up 0.1% in November after being unchanged in October, while prices increased 3.1% from a year ago, according to the U.S. Department of Labor.

Traders are worried that the Fed does not have inflation under control and will have to keep the foot on the accelerator when it comes to interest rates, said Phil Flynn, an analyst with the Price Futures Group.

Fed Chair Jerome Powell said earlier this month that it is “premature” to discuss slashing interest rates. Powell indicated that the central bank is prepared to raise rates if necessary.

Flynn said the confidence of the oil market has been shattered after a seven-week streak of losses.

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Japan’s business mood hits near 2-year high in December quarter

Notable Snippet: Business confidence at big Japanese manufacturers hit a near two-year high in the three months to December, a closely watched central bank survey showed, suggesting the economic conditions needed to unwind massive stimulus were falling into place.

Big non-manufacturers’ sentiment also improved to levels not seen since 1991, the quarterly “tankan” survey showed on Wednesday, dispelling analysts’ concerns that weak consumption could weigh on the fragile economic recovery.

The headline index for big manufacturers’ mood rose to +12 in the December quarter from +9, the tankan showed, improving for the third straight quarter. It compared with a median market forecast for +10 and was the highest level since March 2022.

Big non-manufacturers’ sentiment index rose to +30 from +27, improving for the seventh straight quarter and hitting the highest level since November 1991, the survey showed. It compared with a median market forecast for a reading of +27.

Big firms expect to increase capital expenditure by 13.5% in the current fiscal year ending in March 2024, compared with a median market forecast for a 12.4% increase, the survey showed.

But both big manufacturers and non-manufacturers expect business conditions to worsen three months ahead, the survey showed.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord