Why the market was not happy with the Fed?

Thoughts of the Day

The US Federal Reserve kept interest rates unchanged, shifting focus from solely targeting inflation to balancing employment. Chair Powell indicated no immediate rate cut, causing a drop in March cut expectations. However, the Fed remains data-dependent, with faster-than-expected rate cuts possible if inflation continues to decline. Short-term pressure on risk assets may occur, but dips are likely to be bought in the longer term.

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Day Ahead

The Euro Area Consumer Price Index is expected to show that prices rose +2.8% YoY in January, slightly lower than the +2.9% print in December.

The Euro Area Unemployment Rate is expected to remain at 6.4% in December.

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

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What Happened Yesterday

Market Movements as of New York Close 31 Jan 24
  • US ADP Employment Change showed +107K jobs being added to the economy in January (vs +145k expected), down from +158k in December (revised from +164k). “Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay. Wages adjusted for inflation have improved over the past six months, and the economy looks like it’s headed toward a soft landing in the U.S. and globally,” said ADP chief economist Nela Richardson.
  • The Federal Reserve kept  the Fed funds rate at its 23-year peak of 5.25%-5.5% for the fourth consecutive time, as anticipated by market forecasts. The officials indicated a reluctance to lower rates until there is significant assurance that inflation is consistently heading towards the 2% target. During his press conference, Chair Powell suggested that rate reductions could start within the year, but emphasised decisions would be made on an individual meeting basis, downplaying the likelihood of a cut in March. Additionally, the Fed’s statement no longer mentioned potential rate hikes, reflecting an assessment that the risks towards achieving its employment and inflation objectives are becoming more balanced. However, it also stated readiness to adjust monetary policy if new risks threaten these goals. The central bank acknowledged a reduction in inflation over the past year, though it remains high.
  • The US Treasury Yield curve inversion narrowed to 0.28% as the US 2-year bond yield fell  -0.09% to 4.27% while the 10-year yield slipped -0.07% to 3.99%. The fall in bond yields is likely due to forthcoming expectations of rate cuts.
  • The US stock futures edged lower ahead of the US Federal Reserve meeting through the Asian and London trading sessions with the S&P 500 futures down -0.48% before the New York session began. The downward move was also partially fuelled by poor earnings guidance from Alphabet (-7.50%) and Microsoft (-2.69%) and by renewed worries that US regional banks may be in trouble again now that the Fed ended their cheap loans to banks recently (New York Community Bancorp: -37.8%, Valley National Bancorp: -7.8%, Citizens Financial Group: -4.7%).
  • The US stock market opened lower from Tuesday. It traded on the backfoot as the market waited for the Fed policy decision. When the Federal Reserve Chair pushed back expectations of a March rate cut the sell-off intensified further.  Consequently, the S&P 500 slipped -1.61% lower (high: -0.37%, low: -1.62%), the Dow Jones fell -0.82% (high: +0.32%, low: -0.85%) while the Nasdaq sank -1.94% (high: -0.58%, low: -1.99%). 
  • The crypto market fell along with the weakened risk sentiment in risk assets.
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Headlines & Market Impact

US bank stocks sink after New York Community Bancorp cuts dividend

Notable Snippet: Regional U.S. bank stocks sank on Wednesday, dragged by a 38% plunge in the shares of New York Community Bancorp (NYCB.N) after it cut its dividend and posted a surprise loss, renewing fears over the health of similar lenders.

The KBW Regional Banking Index (.KRX) closed down 6%, its biggest one-day drop since March 13 last year after New York’s Signature Bank collapsed amid depositor panic sparked by the failure days earlier of Silicon Valley Bank.

Deposits have since stabilised, but some investors said Wednesday’s sell-off highlighted ongoing concerns over regional lenders’ health, including that the cost of retaining deposits would squeeze net interest income (NII) which drives lending profits.

“The sector in general is subject to more of an emotional trade simply because depositors can be spooked into feeling like the collapse is imminent. But higher interest rates have been wearing on earnings and NII for a lot of these banks,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.

“Many traders believe that warnings of the type we saw from NYCB are like cockroaches – if you see one, there must be more hiding just out of sight,” said Steve Sosnick, chief strategist at Interactive Brokers.

Investor jitters were amplified on Wednesday as the Federal Reserve left interest rates unchanged. High rates aimed at taming inflation have weighed on regional bank loan profits, as well as the value of securities they hold.

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Fed’s Powell sees lower rates on the horizon as inflation ebbs, economy bounces ahead

Notable Snippet: “Inflation is still too high. Ongoing progress in bringing it down is not assured,” Powell said after the Fed’s policy-setting committee kept the benchmark overnight interest rate in the 5.25%-5.50% range and announced that rate cuts would not be appropriate until there is “greater confidence that inflation is moving” towards the central bank’s 2% target.

But in almost every other way during a 48-minute session with reporters Powell offered an unhedged round of good news about the status of an aggressive war on inflation that many economists felt would tilt the U.S. into recession and throw millions out of work with the highest and fastest rate hikes in roughly 4 decades.

“The executive summary would be: growth is solid to strong … 3.7% unemployment indicates the labour market is strong … We’ve got six good months of inflation data and an expectation that there’s more to come,” the Fed chief said. “Let’s be honest, this is a good economy.”

Powell said rate cuts would come once the Fed becomes more secure that inflation will continue to decline from a level it still characterised as “elevated,” at least on a one-year basis, with the personal consumption expenditures price index, a key measure used by policymakers, at 2.6% on an annual basis as of December.

But he also suggested it was just a matter of time before that conviction kicks in.

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Red Sea supply chain inflation may be peaking already, new trade data suggests

Notable Snippet: The sharp, sudden spike in supply chain inflation caused by the Red Sea crisis and ongoing attacks on shipping vessels by Houthi rebels may have peaked on key global trade routes, based on analysis of the latest data from Xeneta, a leading ocean and and air freight benchmarking platform. It tells CNBC that rates on ocean routes from Asia to Europe and the Mediterranean are beginning to decline, but for U.S.-bound trade, prices are still climbing.

Average February short-term rates for forty-foot containers compared to the last round of general rate increases, implemented on January 16, show a slight decline.

Forty-foot containers originating from the Far East to the Mediterranean per 40-foot container are set to be $5,950 under February’s GRIs. On January 16, rates were at the recent peak of $6,050. On the trade route from the Far East to North Europe, rates for 40-foot containers are set to be $4,820 at the start of February, slightly below the peak of $4,850 on January 16.

“Based on the fact the February general rate increases are below anticipated levels, this suggests ocean carriers have been forced to negotiate down with shippers,” said Emily Stausbøll, Xeneta market analyst. She added this is the best indication of where the market is headed. “It now appears some shippers are pushing back and managing to agree to lower rates. So, we may see rates begin to flatten or decline sooner than many anticipated in February,” she said.

The overall rates are based on an average of all the transactions within each trade route — ocean shipping contracts are not uniformly set, and this is one of the reasons behind the slight decrease. Logistics CEOs tell CNBC they have the ability to negotiate prices down.

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Phan Vee Leung
CIO & Founder, TrackRecord