Markets
At the final meeting of the Fed took an impressive U-turn from its 2023 approach. 2024 will be different chapter for monetary policy. The Fed left its policy rate unchanged at 5.25%-5.50%. A further rate hike isn’t formally ruled out, but the Fed Chair Powell at press conference and the dots clearly signaled that the Fed is trying to find out when it can start scaling back policy tightening. Inflation, also core, is cooling. That allows the Fed to turn the focus away from inflation and again look to the two sides of its mandate, including growth and the labour market. After a strong performance up until the third quarter of this year, activity now shows signs of slowing and the labour market, while still strong, is coming better into balance. The dots see growth at a below trend 1.4% next year down from 2.6% this year returning back to trend in 2025 (1.8%). Unemployment is seen ticking up to 4.1% (2024-26) from 3.8% currently. Slower demand will push PCE inflation to 2.4% next year and 2.1% and 2.0% respectively in 2024 and 2025. This combination will allow the Fed to make policy less restrictive. The dot plot now ‘guides’ 75 bps of rate cuts by the end of next year. Admittedly, dispersion among the views was big. Even so, the new direction of Fed thinking is obvious. Powell in this respect said that the Fed is well aware of the risk of overtightening. The Fed Chair also didn’t give any sign that the MPC felt uncomfortable with recent easing of monetary conditions. A clear go ahead for recent market positioning and that is exactly what happened. US yields fell off a cliff with the curve bull steepening. The 2-y lost 30.4 bps. The 10-y declines 18.4 bps and currently trades below 4.0%. The 30-y still eased 13.3 bps. Markets now full discount a first rate 25 bps rate cut in March and 1.5% easing end next year. Equities flourished with the Dow, S&P 500 and the Nasdaq all gaining about 1.4%. The Dow even set a new all-time top. The dollar tumbles sharply (DXY 102.87, EUR/USD 1.0874), but in both cases stays above the end November low. This was different for USD/JPY setting a now correction (testing 141 this morning).
The focus today turns to policy decisions of the ECB and, to a lesser extent, the Bank of England. As was the case for the Fed, the ‘guidance’ from the ECB staff projections and the assessment of ECB Chair Lagarde at the press conference will be key. Until now, ECB policymakers showed a more decisive ‘leaning against easing’ bias than the Fed. Questions is whether the ECB inflation forecasts will be reduced enough for Lagarde and Co to already formally open the debate on 2024 rate cuts. Even if the ECB takes a more guarded approach, important spill-over effects from the US will hit European markets. If the ECB takes a less obvious U-turn than the Fed, a retest of EUR/USD 1.10 might be on the cards. We also look out for any communication on the start of the roll-off of the ECB’s PEPP bond portfolio.
News headlines
Australian November employment crushed expectations, adding 61.5k jobs, well above the 11.5k expected. The participation rate hit a new record high of 67.2%. The increased pool of available workers caused the unemployment rate to rise somewhat (3.9%) but it stays well below pre-pandemic levels of around 5%. Head of the Australian Bureau of Statistics’ labour department Jarvis concluded that “We have continued to see employment growth keeping pace with high population growth through 2023.” The strong labour report does little to offset the effect of yesterday’s Fed pivot on markets outside the US though. Australian swap yields did find a bottom shortly after the release this morning. They currently drop 1-3.1 bps. Following the Fed decision, money markets now expect a first RBA rate cut in June compared to September/November just yesterday. The Aussie dollar extends a (mainly USD-driven) surge with AUD/USD now at the highest level since July (0.672).
GDP in New-Zealand unexpectedly contracted in Q3 at -0.3% q/q vs a 0.2% expansion expected, bringing the yearly figure to -0.6% (0.5% consensus). Q2 numbers also were sharply downwardly revised (from 0.9% to 0.5%). The goods producing sector took the brunt in a deceleration (-2.6% q/q) while services still eked out some growth (0.4%). The contraction suggests the Reserve Bank of New Zealand’s tightening is really kicking in. The expenditure approach showed household spending dropping (-0.6%) as well as exports. The RBNZ held the policy rate unchanged at 5.5% since May, signaled the risk of a further hike next year and penciled in no rate cuts until mid-2025. But markets don’t believe one word, especially not after the Fed. A first cut is seen in May. The damage for the kiwi dollar remains contained thanks to a weak USD. NZD/USD even rebounded to the strongest level since July (0.623).
