Trading Probably a Long-Drawn Countdown to Fed Decision

Market

November US CPI yesterday was the final piece of the monetary puzzle before today’s Fed decision, but it didn’t change the global portrait. At 0.1% M/M and 3.1% Y/Y (headline) and 0.3% M/M and 4.0% for the core, the outcome was close to, maybe marginally higher than expected. Markets also didn’t know what conclusion to draw. A first Pavlov attempt of bonds to rally was immediately blocked, but the subsequent ‘rebound’ in yields was unconvincing too. US yields closed little changed on the day, but a few basis points higher compared to just before the CPI release. German Bunds again outperformed with yields easing between 0.1 bp (2-y) and 5.9 bps (30-y). Especially EMU/German LT yields struggle to leave recent lows behind. The dollar briefly recouped intraday losses post CPI, but couldn’t maintain its gains. DXY closed at 103.86 (from 104.1). EUR/USD also gained modestly despite a euro-negative interest rate differential (close 1.0794). Both moves are technically insignificant. Dollar ‘softness’ probably was inspired by a constructive risk sentiment as major US indices all closed at new 2023 peak levels. Also something to watch out for with respect to ST inflation (expectations) and purchasing power: oil again declined substantially (Brent $73 p/b). UK gilts strongly outperformed after softer than expected UK labour data. Sterling’s recent comeback (especially against the euro) was aborted; EUR/GBP rebounded to the 0.86 area.

Asian equities mostly trade in red. China underperforms as markets are disappointed on the few signs of stimulus coming from the annual economic work conference. Japan outperforms on a constructive BOJ Tankan rapport with both the large manufacturing (12 from 9) and the non-manufacturing indices (30 from 27) improving more than expected. However, this won’t be a decisive factor as to whether the BOJ will change its policy anytime soon.

Today, market trading probably will be a long-drawn countdown to the Fed decision. Anything different from an unchanged decision will be a massive surprise. Markets keep a close eye on ‘guidance’ from the summary of economic projections (dots). The Fed skipping previous guidance on one additional rate hike and sticking to 50 bps of cuts end 2024 might be an ‘equilibrium’ scenario for markets. Also keep an eye on whether the Fed will raise the neutral policy rate. In the press conference, we look out what Fed Chair Powell says on the substantially loosening of monetary conditions since the previous meeting. Is the market now working against the Fed’s efforts to cool demand and temper inflation? Maybe the Fed governor might also stress ongoing residence in economic activity, which might keep the supply-demand balance stretched for longer than expected. From a market point of view, however, the Fed probably will have to bring a very hawkish message to trigger a real countermove.

News headlines

Argentina’s new government under, Javier Milei, announced it’ll start a shock therapy to the country’s “addiction to fiscal deficits”. Economy minister Caputo outlined 10 initial measures. The peso will be devaluated by 54%, moving the USD/ARS exchange rate to 800 (366 today). The devaluation is massive but falls short of what the peso is traded for at the black market (USD/ARS rates above 1000). The government will allow the peso to weaken by further 2% per month. Capital controls remain in place to avoid a sudden sharp depreciation that would sent inflation (140%+), even higher. Fiscal spending will be slashed by halving the number of ministries, cutting transfers to provinces, suspending public works and reducing subsidies. The government estimates the measures at about 2.9% of GDP. It wants to eliminate the primary budget deficit in 2024. The likes of the IMF, which is owed $43bn by Argentina, hailed the package, even though it lacks details still. Others doubt whether there is enough popular and political support.

Hungary is prepared to drop its veto on a €50bn four-year support package for Ukraine in return for Hungarian funds held back by the EU over concerns of graft and the rule of law, news agency Bloomberg reported after an interview with PM Orban’s chief political advisor, Balazs Orban. Hungary in recent weeks blocked all issues related to Ukraine, with its position toughened over frustration of Ukraine potentially joining the European bloc. While the EU is about to release about €10bn in blocked financing by Wednesday after the Hungarian government passed laws to strengthen judicial independence, Budapest wants the block to hand over the full amount of €30bn. The olive branch (?) offered by Hungary comes ahead of a EU leader meeting on the broader budget starting Thursday.