Equities, bonds and the USD are moving sideways as the markets prepare for what is likely to be the most important meeting of the Federal Reserve this year. The markets continue to expect rapid interest rate cuts by the Fed, although expectations have recently shifted somewhat: The majority of investors now expect rate cuts to begin in May 2024, instead of March 2024 as in the previous week.
The Fed and Fed Chairman Jerome Powell will probably once again try to push back dovish hopes of rapid rate cuts. The market is expecting a total of 100-125 basis points of rate cuts over the next 12 months – very optimistic.
Friday's NFP data pushed rate cut expectations lower – more so than yesterday's CPI data, which was in line with expectations but showed that disinflation in the US has slowed and super core inflation actually rose the most this year in the previous month.
At its two-day meeting, which ends today, the FOMC will leave the key interest rate in a range of 5.25% – 5.5%. The interest rate decision and the accompanying statement will be published at 19:00 UTC+0. 30 minutes later, Chairman Jerome Powell will hold a press conference.
I expect Powell to reiterate that the FOMC expects rates to remain “higher for longer” and that it would be premature to declare a victory over inflation and provide some forward guidance on rates to keep the market from pricing in short-term (quick) rate cuts. However, it remains questionable whether the market will believe Powell's words – I tend to think not. I also expect the dot plot to show fewer rate cuts than expected, which should cause short-term selling in equities and give further strength to the USD.
Probably risk sentiment will deteriorate ahead of the rate decision, including a stronger USD, but then there will be limited additional headwinds for risk sentiment / equities despite the hawkish comments from the Fed.
👁 ROB'S MARKET OVERVIEW:
December 13, 2023
🌐/🇺🇸 Global/US Markets ➡️/↘️/↕️ (sideways ahead of rate decision, then much volatility and potentially slight additional losses depending mostly whether markets believe the Fed's view that rate cut expectations went too far).
USD ➡️/↗️/↕️ (Powell's likely hawkish comments will provide some additional tailwinds for USD)
AUD, CAD ↗️/↘️
⚒ Commodity Markets ↕️/↘️
Oil prices ↗️/➡️/↘️ (recovery attempt after yesterday's sharp losses, remains bearish – especially if Powell's words seen as very hawkish)
Natural Gas prices ↕️/↘️ (remains weak)
Metal prices ➡️/↘️
Gold ↗️/➡️/↘️ (slight recovery attempt after sharp losses; more headwinds ahead of rate decision)
⚡️Cryptos ↕️ (recovery attempt / some headwinds ahead of rate decision)
(*↗️ bullish, ↘️ bearish, ➡️ sideways / stable, ↕️ mixed / volatile)