Tag: Federal Reserve

Are Markets Head-Faking Rate Cuts Early This Year?

After the December Federal Reserve Press Conference where Jerome Powell appeared to pivot to rate cuts ahead, with a more dovish tune than just a few days before, markets dialed up their expectations of up to six rate cuts though 2024, and stock markets veered towards all time highs, while bond yields fell. Powell said at the press conference that it was premature to declare victory, though he did acknowledge the question of when to begin “dialing back” policy restraint was discussed.

Futures markets have been anticipating the Fed will cut rates six times this year, beginning with a likely quarter-point reduction in March. Traders have priced in a 67% chance of a 25 basis point rate cut in March though several Fed officials have pushed back against expectations of an imminent policy move in recent weeks.

Which begs the question, are markets fooling themselves?

Well, we now have the minutes of the Dec. 12-13 Federal Open Market Committee meeting which were released yesterday. “Participants viewed the policy rate as likely at or near its peak for this tightening cycle,” the minutes said.

Officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.”

This helps to explain why markets are lower, and bond yields higher. So yes, markets are ahead of themselves.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Are Markets Head-Faking Rate Cuts Early This Year?
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Are Markets Head-Faking Rate Cuts Early This Year?

After the December Federal Reserve Press Conference where Jerome Powell appeared to pivot to rate cuts ahead, with a more dovish tune than just a few days before, markets dialed up their expectations of up to six rate cuts though 2024, and stock markets veered towards all time highs, while bond yields fell. Powell said at the press conference that it was premature to declare victory, though he did acknowledge the question of when to begin “dialing back” policy restraint was discussed.

Futures markets have been anticipating the Fed will cut rates six times this year, beginning with a likely quarter-point reduction in March. Traders have priced in a 67% chance of a 25 basis point rate cut in March though several Fed officials have pushed back against expectations of an imminent policy move in recent weeks.

Which begs the question, are markets fooling themselves?

Well, we now have the minutes of the Dec. 12-13 Federal Open Market Committee meeting which were released yesterday. “Participants viewed the policy rate as likely at or near its peak for this tightening cycle,” the minutes said.

Officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.”

This helps to explain why markets are lower, and bond yields higher. So yes, markets are ahead of themselves.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Central Bank Inflation Poker Fragments

While markets seem to be thinking about coordinated rate cuts next year, the truth is, economies are in very different positions, with New Zealand already looking stagflationary, and the ECB and the Bank of England not sharing the rate cut love exhibited by the FED. Norge Bank lifted this past week, and the RBA is still not close to a cut.

So we think the inflation poker game is fragmenting. The results will still be higher rates for many, for longer than the markets are signalling.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Central Bank Inflation Poker Fragments
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Central Bank Inflation Poker Fragments

While markets seem to be thinking about coordinated rate cuts next year, the truth is, economies are in very different positions, with New Zealand already looking stagflationary, and the ECB and the Bank of England not sharing the rate cut love exhibited by the FED. Norge Bank lifted this past week, and the RBA is still not close to a cut.

So we think the inflation poker game is fragmenting. The results will still be higher rates for many, for longer than the markets are signalling.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Find more at https://digitalfinanceanalytics.com/blog/ where you can subscribe to our research alerts

Do We Have A FED Pivot Now Then?

Is a great monetary pivot near as central bankers engineer a once-unthinkable soft landing in the world’s largest economy. It seems, finally, and for now, Wall Street traders and the Federal Reserve are on the SAME PAGE.

Wednesday was quite a day, which took an unexpected turn when the FOMC, the quarterly “dot plot” or survey of economic projections, and then Powell’s 45-minute press conference, all came as close to promising early rate cuts as a central bank could ever do. It smelt like a pivot was on the cards.

Sure, the FOMC wanted to leave a possible rate hike “on the table,” and said it intends to carry on shrinking its balance sheet by selling off bonds, which all else equal will tend to tighten monetary policy. But the direction of Powell’s comments was unmistakable. The Fed is now only too happy for the market to price in imminent rate cuts.

This was not what I had expected, given the recent data. Remember all the focus the Fed has directed to so-called “supercore” inflation (services excluding shelter), which was higher in November than in October on both a month-on-month and year-on-year basis?

But, no, in a rather remarkable press conference, the signals were sprinkled through the 45 minutes, as he said policy was now “well into restrictive territory” (not merely “restrictive” as he said in November, when conditions were tighter than now).

The markets reacted by pushing most asset prices higher, taking bound yields lower. The two-year yield, most sensitive to near-term rate cuts, its minute-by-minute moves show that it was taken by surprise. After a dive when the dot plot was published, it managed to fall significantly further as Powell spoke.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Do We Have A FED Pivot Now Then?
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Do We Have A FED Pivot Now Then?

Is a great monetary pivot near as central bankers engineer a once-unthinkable soft landing in the world’s largest economy. It seems, finally, and for now, Wall Street traders and the Federal Reserve are on the SAME PAGE.

Wednesday was quite a day, which took an unexpected turn when the FOMC, the quarterly “dot plot” or survey of economic projections, and then Powell’s 45-minute press conference, all came as close to promising early rate cuts as a central bank could ever do. It smelt like a pivot was on the cards.

Sure, the FOMC wanted to leave a possible rate hike “on the table,” and said it intends to carry on shrinking its balance sheet by selling off bonds, which all else equal will tend to tighten monetary policy. But the direction of Powell’s comments was unmistakable. The Fed is now only too happy for the market to price in imminent rate cuts.

This was not what I had expected, given the recent data. Remember all the focus the Fed has directed to so-called “supercore” inflation (services excluding shelter), which was higher in November than in October on both a month-on-month and year-on-year basis?

But, no, in a rather remarkable press conference, the signals were sprinkled through the 45 minutes, as he said policy was now “well into restrictive territory” (not merely “restrictive” as he said in November, when conditions were tighter than now).

The markets reacted by pushing most asset prices higher, taking bound yields lower. The two-year yield, most sensitive to near-term rate cuts, its minute-by-minute moves show that it was taken by surprise. After a dive when the dot plot was published, it managed to fall significantly further as Powell spoke.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Disappointing US Inflation Data Will Keep The Fed Hawkish…

The last mile of the journey in getting inflation back into its box, is the hardest and most intractable. So while US inflation is much lower than it was the latest release yesterday, ahead of the FED rate decision today shows it’s not declining quickly and remains above the Federal Reserve’s targets.

In summary, core inflation matched market expectations in November, increasing at a marginally faster rate of 0.3%. In annualised trend terms, core inflation is running at 3¼%, with rapid core goods disinflation of 3¾% broadly offsetting faster core services inflation of 5½%. But core services excluding housing inflation has picked up to 6% in annualised trend terms, while the trimmed mean CPI – which gives a sense of the breadth of price rises – has picked back up to 3¾%.

The initial spike in 2021 was driven by goods prices, which had been stable for years. That was mainly thanks to the pandemic’s effect on supply chains. That shock is over. At this point, inflation is almost entirely about core services, which include shelter.

The FOMC won’t change rates this week, but it does get to revise the “dot plot” which shows its projected course of interest rates ahead. That would be a way to assure the market that rates are coming down swiftly, but for now the Fed could be reluctant to do anything that encourages more speculation.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Disappointing US Inflation Data Will Keep The Fed Hawkish...
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Fed Holds, And Watches Consumers For Signs Ahead!

As expected, the US central bank’s policy-setting Federal Open Market Committee kept rates on hold following their latest meeting – in a target range of 5.25%-5.5%, a 22-year high. The decision is unanimous 12-0.

The S&P 500 index and Treasuries extended their rally while the dollar slipped after the announcement. Traders also marked down chances of another hike over the coming months.

Officials made minimal changes to the statement. One tweak was to upgrade their description of the pace of economic growth to “strong” from “solid” to reflect better economic data released since their September gathering.

They continue to leave the door open to another hike by repeating prior language on “determining the extent of additional policy firming that may be appropriate”.

They said the economy expanded at “strong pace in third quarter,” compared with prior description of recent “solid pace”; though job gains “have moderated since earlier in the year but remain strong,” after previously saying that hiring had slowed in recent months.

And they flagged that tighter financial and credit conditions” will likely to weigh on economy, after previously mentioning only “tighter credit conditions”; language could be seen as suggesting that the recent jump in long-term Treasury yields reduces the impetus for Fed to raise rates again.
“The extent of these effects remains uncertain,” the Fed said, repeating that it “remains highly attentive to inflation risks.”

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Today’s post is brought to you by Ribbon Property Consultants.

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Fed Holds, And Watches Consumers For Signs Ahead!
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Fed Holds, And Watches Consumers For Signs Ahead!

As expected, the US central bank’s policy-setting Federal Open Market Committee kept rates on hold following their latest meeting – in a target range of 5.25%-5.5%, a 22-year high. The decision is unanimous 12-0.

The S&P 500 index and Treasuries extended their rally while the dollar slipped after the announcement. Traders also marked down chances of another hike over the coming months.

Officials made minimal changes to the statement. One tweak was to upgrade their description of the pace of economic growth to “strong” from “solid” to reflect better economic data released since their September gathering.

They continue to leave the door open to another hike by repeating prior language on “determining the extent of additional policy firming that may be appropriate”.

They said the economy expanded at “strong pace in third quarter,” compared with prior description of recent “solid pace”; though job gains “have moderated since earlier in the year but remain strong,” after previously saying that hiring had slowed in recent months.

And they flagged that tighter financial and credit conditions” will likely to weigh on economy, after previously mentioning only “tighter credit conditions”; language could be seen as suggesting that the recent jump in long-term Treasury yields reduces the impetus for Fed to raise rates again.
“The extent of these effects remains uncertain,” the Fed said, repeating that it “remains highly attentive to inflation risks.”

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Today’s post is brought to you by Ribbon Property Consultants.

Is It Déjà Vu All Over Again?

With bond yields surging back to levels not seen since 2016 in recent months, there has been no shortage of comparisons between the current state of markets and that on the eve of the global financial crisis. In fact, the parallels drawn between conditions now and in 2007 appear pretty strong when you take a look.

Simultaneous falls in bonds and equities could hit parity trades. The sort of asset mismatches we saw in the collapse of Silicon Valley Bank could return. With mortgage rates in the US at 8 per cent, both sides (sell and buy) of the real estate market could completely freeze.

Pockets of the economy that have less transparency could be in trouble, such as private equity and particularly private credit provided by hedge funds, which has become increasingly important given the banks have backed away from commercial lending.

As in the GFC, “trust between banks could suddenly evaporate”, while a move up in the US dollar could sap global liquidity at the wrong time.

Perhaps ASX investors should think about the bigger picture. Despite all that’s happened in the past 15 years – the GFC and recovery, the pandemic and recovery – they don’t have a lot to show for it.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Is It Déjà Vu All Over Again?
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