Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
You can access both of our platforms from a single Saxo account.
Fed has a final chance to pushback on rate cut expectations
Charu Chanana
Head of FX Strategy
Summary: The US inflation was a mixed bag, as headline and core prints rising month-on-month but headline YoY came down and core YoY was unchanged. Details and long run trends suggest disinflation continues, but today’s announcement may be the Fed’s final chance to push back on market’s rate cut pricing. We consider three scenarios for Fed’s 2024 dot plot and the market impact that could bring.
Thoughts on US inflation report
US November CPI was a mixed bag. Headline CPI came in above expectations at 0.1% MoM vs. flat previous and expected, while the YoY cooled to 3.1% from 3.2% previously. Core measure was as-expected at 0.3% MoM (prev: 0.2%) and 4.0% YoY (prev: 4.0%).
While some could say the disinflation has made further progress (as headline YoY was down), others could say that core is rather sticky at 4% YoY.
The breakdown suggests that the cooling in core goods inflation is broadening, which suggests that the decline could be sustainable. Core services was a key problem area, and it appears that only a few categories, particularly shelter, drove much of the upside. Long run trends continue to suggest that the disinflation momentum is extending. Meanwhile, with oil prices near their recent floor of sub-$70/barrel for WTI, there will be little reason for the Fed to panic about anything seen in the latest inflation report.
What to expect from the Fed?
The December meeting is the Fed’s last chance to pushback on rate cut expectations. It remains clear that the rate hike cycle has ended, and investors are now focused on when the rate cuts could begin. That will make the dot plot very relevant today, although the ability of the dot plot to predict the future has been poor.
The September dot plot, as shown above, had a median 2023 projection of 5.6% as another rate hike was in the forecast. That will be removed and 2023 dot will be at 5.4% now. As for 2024, there are three scenarios:
- Sept dot plot showed a median projection of 5.1% for 2024. If that is maintained, that will now mean just one 25bps rate cut in 2024. This is a low probability outcome, but will serve as a massive pushback on market’s rate cut expectations for next year.
- Bonds: Yields likely to go up
- Equities: Could be bearish, especially the interest rate sensitive stocks
- FX: Dollar will likely strengthen, and EUR, AUD, NZD and Gold may have the most room to lose
- If the Fed maintains 50bps of rate cuts in its 2024 projections, that will mean the media 2024 dot shifts lower to 4.9%. This is the most likely outcome and it could see the current soft landing expectations getting extended.
- Bonds: Yields still likely to go up as markets have priced in far more rate cuts
- Equities: Likely to be sideways-to-higher as the current momentum is extended
- FX: Dollar could be mixed or somewhat lower, but a relative ECB dovishness on Thursday could bring back dollar gains
- If the fed adds even one more rate cut to its projection to expect 75bps rate cuts for next year, bringing the median dot to 4.6% or lower, that could have significant implications for the market. Again, this may be a low probability outcome as growth and labor data is still resilient.
- Bonds: Yields are likely to fall
- Equities: Could potentially rise, especially NASDAQ 100 or the tech stocks
- FX: Dollar will be bearish, which could bring potential gains in JPY, NZD, GBP and Gold.
-----------------------------------------------------------------------
Latest Macro/FX articles:
Weekly FX Chartbook and Podcasts
13 Dec: Relative Fed and ECB policy messaging to matter more than absolute stances
11 Dec: Macro and FX Podcast: Will central banks, inflation, and PMIs deliver fireworks?
4 Dec: Dovish Fed and ECB bets picking up
4 Dec: Macro and FX Podcast: Key macro data this week, the USD slide ended and gold is on the move
Daily Notes
5 Dec: RBA under-delivers: AUD momentum could turn bearish, particularly on the crosses
1 Dec: USD in a dovish fatigue, EUR gives up 1.10, and markets look to Powell
29 Nov: RBNZ needs a reality check
28 Nov: Dollar decline could face tests from month-end flows and OPEC meeting outcome
24 Nov: Japan inflation rebound unlikely to deter Bank of Japan
22 Nov: US exceptionalism still lingers
15 Nov: Peak Fed rates won’t mean end of USD strength
7 Nov: AUD loses ground on RBA’s dovish hike
Latest Market Insights
Quarterly Outlook 2024 Q3
Sandcastle economics
-
-
Bonds: What to do until inflation stabilises
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.
-
Equities: Are we blowing bubbles again
Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.
-
FX: Risk-on currencies to surge against havens
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.
-
Commodities: Energy and grains in focus as metals pause
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.
Disclaimer