Breakfast Bites - The Fed says Goodbye to 2023

Rise and shine everyone.

Today’s focus is the Fed rate decision that comes at 2 pm ET followed by Fed Chair Jerome Powell’s press conference at 2:30 pm ET. Markets will be watching for the Fed to announce a pause and any discussion around rate cuts. As a reminder, we also get the Summary of Economic Projections, and what the Fed is forecasting in terms of rate cuts for next year will be of utmost importance. In September they lowered their projections around cuts to only 50 bps for 2024.

Here's where the data stands compared to the last SEP. The readings are much better than the Fed's projections. This is likely the reason, we're not going to see a hike today and unless something extremely drastic happens with inflation, we're not likely to see another hike during this cycle.

Now given that financial conditions have tightened and inflation is now well within their year-end target, the question will be: Will the Fed increase their rate cut projections?

I don’t see why they would have to. They’ve indicated that rate cuts are to begin after mid-2024 and if we go by that schedule, they have a meeting in March where they could change their projections. Something to definitely keep an eye on. The other aspect would be to keep a close watch on inflation and growth projections, changes to these could indicate far more about what the Fed is thinking even if they don’t change the rate projection.

Ahead of the Fed meeting, we get the US PPI numbers as well. Last earnings season, we discussed how the decline in PPI and Inflation would start to show up in terms of reduced pricing power and declining revenue growth. With a deceleration in PPI, that issue still remains on the table for companies. (See Chart of the Day below)

Finally, we also have Brazil’s rate decision today after the Fed (usually after the US Market close).

US Equity futures are marginally higher with the S&P500 futures crossing 4700. Yesterday’s CPI numbers and average 30-year bond auction have yields lower across the curve. The Yield Curve has inverted slightly to -0.54%. The US Dollar remains in a decision zone at the high end of 103, while Gold and Bitcoin remain muted. Oil is off its worst levels from yesterday after a sharp 4% pullback to $68/bbl.

Asia and Australia

• Asian markets mixed. China and Hong Kong saw strong declines. Nikkei and Kospi also lower. India and Australia are higher.

• China’s Central Economic Work Conference did not yield the kind of stimulus packages that were expected. There was a lot of focus on industrial production growth but, not much on ailing the property market or boosting domestic consumption. Markets sold off quite a bit on this because, yet again there’s disappointment in terms of any tangible measures.

• In November 2023, South Korea's seasonally adjusted unemployment rate increased to 2.8%, the highest since July, up from 2.6% the previous month. Employment growth slowed, with a year-on-year increase of 277,000 jobs, down from 346,000 in the prior month. Job additions, which had dipped below 300,000 in July and later recovered, remained below October's 300,000 level.

• Bank of Japan (BOJ) announcement related to daily outright bond buying operation: again leaves amounts unchanged

  • Offers to buy ¥375B in 1-3 yr JGBs v ¥350-650B plan

  • Offers to buy ¥525B in 5-10 yr JGBs v ¥450-900B plan

  • Offers to buy ¥75B in >25 yr JGBs v ¥50-350B plan.

Europe, the Middle East, and Africa

• European markets also muted ahead of central bank meetings tomorrow: ECB, Bank of England, Norway’s Norges Bank, and Swiss National Bank.

• In October 2023, the UK economy contracted by 0.3%, underperforming expectations of no change and ending two months of growth. The services sector, especially information and communication services like computer programming and media production, led this decline. Consumer services also fell slightly. Manufacturing saw widespread decreases, particularly in electronics and machinery, and construction output dropped, partly due to bad weather. Over the three-month period up to October, the UK's GDP showed no growth. UK 10-year yield dropped 6bps to 3.90% (lowest since mid-May) following GDP data and rate cut bets are increasing. We largely believe that the UK may be the last to cut among the major developed countries. However, a lower GDP growth may change that outlook. BoE’s rate decision is tomorrow.

• On a month-over-month basis, the UK’s industrial production slightly decreased by 0.1%, compared to the previous month's figure of 0.0%. Year-over-year, industrial production recorded a 1.1% increase, which is a decline from the prior year's 1.5%.

• The German IFW Institute updated its economic forecast, raising its 2023 GDP growth estimate from -0.5% to -0.3% but lowering 2024's from 1.3% to 0.9% and 2025's from 1.5% to 1.2%.

The Americas

• Argentina devalued its currency by 54%. The IMF welcomed the decision saying that this will help stabilize the economy and set the basis for more sustainable and private-sector-led growth. In other news, the Argentina Central Bank (BCRA) leaves the LELIQ Rate (main policy rate) unchanged at 133.00% and cuts the 1-day repo rate to 100%.

• The CPI data matched expectations, yet the market's attention was drawn to the rise in the super core segment, which went up by 0.4%, with its three-month average annualized rate reaching 5.2%. Additionally, the unexpected increases in used car prices and shelter costs stood out, especially since they deviate from more frequently reported data.

• The 30-year bond auction attracted excess demand, which supported bond prices throughout the session and positively influenced stock markets.

Chart of the Day: US PPI tends to lead the S&P500 revenue growth lower.

Calendar

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)