What’s next for the Fed?

Thoughts of the Day

As expected, the US Federal Reserve kept interest rates unchanged. Fed Chair Powell’s dovish comments hinted that the projected 0.25% increase before year-end is reduced. This boosted risk sentiment and caused market pricing of the December hike odds to drop from 30% to 15%.

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Day Ahead

The Bank of England is expected to keep interest rates at 5.25% in its monetary policy decision.

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What Happened Yesterday

Market Movements as of New York Close 1 Nov 23
  • The US ADP Employment Change showed that +113k jobs were added to the economy in October (vs +150k expected), an increase from +89k previously. The US JOLTS job openings grew to 9.553M (vs  9.2M expected) in September from 9.497M previously (revised from 9.61M).
  • The Federal Reserve unanimously kept interest rates unchanged at 5.5% in its monetary policy meeting as expected as the central bank seeks to bring inflation back to the 2% target without over tightening. Although the central bank emphasised that rate hikes were not considered at this point, Powell signalled that the September dot-plot showing the majority of participants forecasting one more rate hike this year may not be accurate anymore. Even so, he also added that the central bank stands ready to hike if the progress on inflation is stalled.
  • The US Treasury Yield curve inversion fell to 0.18% as the US 2-year bond yield fell -0.12% to 4.95% while the US 10-year bond yield slipped -0.11% to 4.77%.
  • The US stock futures traded quietly through the Asian and London trading sessions ahead of the US labour data and Federal Reserve meeting in the US hours. It then started to grind higher on the back of weaker than expected US ADP data and a revised job openings number with the S&P 500 futures rising +1.00% following the release of both numbers.
  • The US stock market opened higher from Tuesday. It then started to creep lower ahead of the Federal Reserve meeting before grinding higher following the relatively dovish comments from the Federal Reserve Chairman Powell. Consequently, the S&P 500 closed the day higher at +1.05% (high: +1.24%, low: +0.09%), the Dow rose +0.67% (high: +0.86%, low: -0.13%) while the Nasdaq jumped +1.77% (high: +1.86%, low: +0.22%).
  • The crypto market strengthened on the back of improved risk sentiment on the day as well with Bitcoin up +1.73% and Ether up +1.53%.
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Headlines & Market Impact

Japan’s Kishida announces $113-bln package to combat inflation pain

Notable Snippet: Japanese Prime Minister Fumio Kishida said on Thursday the government will spend over 17 trillion yen ($113 billion) in a package of measures to cushion the economic blow from rising inflation, which will include tax cuts.

To fund part of the spending, the government will compile a supplementary budget for the current fiscal year of 13.1 trillion yen, Kishida told reporters.

Reuters reported on Wednesday the government is considering spending over 17 trillion yen for the package, which will include temporary cuts to income and residential taxes as well as subsidies to curb gasoline and utility bills.

Inflation, fuelled by rising costs of raw materials, has kept above the central bank’s target of 2% for more than a year, weighing on consumption and clouding the outlook for an economy making a delayed recovery from scars left by COVID-19.

With increases in wages proving too slow to offset rising prices, Kishida had said the government will cushion the blow by returning to households some of the expected increase in tax revenues generated by solid economic growth.

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China sets the tone on real estate, local government support at a high-level meeting

Notable Snippet: China signalled support for property developers and resolving local government debt problems in a high-level financial meeting that ended Tuesday, according to a state media readout.

Such twice-a-decade financial work conferences tend to set long-term policy directions, which then pave the way for more detailed moves.

“Policymakers emphasised that private and state-owned property developers would be treated equally and their reasonable funding demands would be satisfied,” Goldman Sachs’ Maggie Wei and a team said in a report published Wednesday.

“Policymakers would establish a long-term effective mechanism to resolve local government debt and ‘optimise the structure of central and local government debt,’” the report said.

The government meeting held Monday and Tuesday also reflected the ruling Chinese Communist Party’s increased oversight of finance. Delayed by more than a year, the latest meeting was called the “central” financial work conference — instead of “national” as it was called in 2017.

What we think: This will give more confidence to investors as the Chinese government seeks to solve the problems of insolvency and riskiness amongst the developers in China.

Treasury details plans to step up size of bond sales to manage growing debt load and higher rates

Notable Snippet:  The Treasury Department announced plans Wednesday to accelerate the size of its auctions as it looks to handle its heavy debt load and with financing costs rising.

In a development getting close attention on Wall Street, the department detailed its refunding plans for future debt sales. The announcement comes with Treasury yields around their highest levels since 2007, a reflection of financial markets spooked over how much damage higher borrowing costs could exact.

Most immediately, the Treasury will auction $112 billion in debt next week to refund $102.2 billion of notes set to mature Nov. 15, raising more than $9 billion in extra funds.
From there, the department said it will increase the auction size of various maturities, focusing more on coupon-bearing notes and bonds. The Treasury will maintain its current auction size for bills until late November, when it expects to have its general account replenished enough to implement “modest reductions” through mid- to late-January.

Stock market futures came off their lows of the morning following the announcement, while Treasury yields were lower.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord