FOMC meeting preview: none so deaf as those that will not hear.

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary: 
- Before the FOMC meeting, the focus will be on CPI data for the 3-, 10- and 30-year auctions. Demand for duration amid disinflationary trends will be tested on Tuesday.
- The federal fund rate is likely to be left unchanged at 5.25%-5.5%. Still, the revision of the Federal Reserve’s summary of economic projections (SEP) and the dot plot will be a critical focus.
- An upward revision in growth due to a faster disinflationary trend could fuel further speculations of a soft landing, but it will also put at odds markets’ expectations of five rate cuts in 2024.
- A lower dot plot and lower projected inflation will likely consolidate the recent bond rally.
- In the coming months, the Federal Reserve needs to move towards cuts quickly to justify current bond future valuations, and that will unlikely happen, putting upward pressure on yields.
- Significant pre-emptive rate cuts are unlikely amid supportive fiscal spending.


Although the Fed fund rate is likely to be left unchanged, the FOMC December meeting will certainly not be dull.

Markets are pricing 125 basis points rate cuts by the end of next year as investors are fast to claim that inflation is dead. However, the FOMC September dot plot shows that policymakers expect to cut rates only twice next year, making the divergence between markets and the Federal Reserve's projections the perfect volatility cocktail.

Despite such a dramatic divergence in rate cut expectations, economists are somewhat aligned with the FOMC summary of economic projections (SEP) for the next few years. Indeed, core PCE is expected by the end of next year at 2.7% by economists surveyed by Bloomberg and at 2.6% by the SEP. Similarly, real growth and the unemployment rate are expected at 1.5% and 4.1% according to SEP and around 1.2% and 4.3% by economists.

Yet, the Fed might be looking to update some of those projections. In October, the core PCE price index was up 3.5% YoY, well below the 3.7% the Fed estimated to end the year with. At the same time, the October unemployment rate has risen to 3.9%, well above the unemployment rate expected by the central bank at the end of 2023.

That should lead the Fed to revise inflation down and unemployment up, agreeing with markets' view that there is no reason to hike any further, fueling discussions concerning when interest rate cuts will begin and by how much.

Yet, it’s uncertain what the SEP will show in terms of real growth projections. Seeing a faster disinflationary trend than anticipated might lead to an upward revision in growth, fueling speculations of a soft landing. That might be enough to put at odds market expectations of five rate cuts next year, besides the dot plot.

The FOMC dot plot will be the market's big focus. The median rate cuts expected for next year and 2025 will likely shift further down. However, considering that in September, only five members were showing a rate of 4.625% or below by Q4 2024, it is unlikely that we are going to see other members lowering their expectations below that threshold, making the Q4 2024 median rate more likely to remain between 4.8% to 5%.

Although the gap between policymakers and bond future markets' expectations of rate cuts will remain wide, a lower dot plot combined with lower projected price pressures will likely consolidate the recent bond rally.

The real challenge for bond markets will come in the next couple of months when central banks need to move towards cuts quickly to justify current bond future valuations.

Central banks are unlikely to deliver aggressive rate cuts pre-emptively for the following reasons:

  1. Pre-emptive cuts might add to inflationary pressures, especially in a supportive fiscal environment.
  2. Lower rates reduce central banks’ potential to ease the economy amid an upcoming recession.

That’s why, as central banks have fought to significantly tighten the economy amid a dangerously high wave of inflation, they will only move once they have the certainty of having fixed this problem. Otherwise, they risk entering stagflation, a period of high inflation and high unemployment, which is a much more challenging scenario to deal with, especially during an election year.

Ahead of the FOMC meeting: three-, ten-, and thirty-year US Treasury auctions and CPI numbers.

Next week is not going to be all about the Fed. Markets will have to weather a double auction on Monday, with the US Treasury selling three- and ten-year US Treasury, a thirty-year auction, and CPI numbers on Tuesday.

The 10- and 30-year US Treasury auctions will be the main focus, as after the dramatic drop in yields, buying longer-term bonds has become most expensive since September. After witnessing an ugly 30-year US Treasury auction last month with primary dealers taking 24.7% of the issue, the largest share since November 2021, the question is whether investors will step in this time when the yield on the 30-year tenor is roughly 50bps lower than last month. Weak bidding metrics in the 30-year tenor might reignite the bear steepening of the yield curve.

To set the grounds ahead of the 30-year auction is a new set of US CPI data. While the headline CPI is expected to have dropped to 3.1% YoY in November from 3.2% in October, Core CPI is expected to have remained flat at 4%. While it is true that if numbers show a faster disinflationary trend that would be bullish for bonds, it's key to bear in mind that it is more likely for an auction to tail if a considerable drop in yields precedes it. Yet, the magnitude of such a tail will dictate whether investors see it or not as a sign of fiscal dominance, as well as the constraints that the US Treasury has in raising additional new debt in markets. Let's remember that the US Treasury was meant to sell $38 billion in 10-year notes and $22 billion in 30-year bonds next week, according to suggestions from the Treasury Borrowing Advisory Committee TBAC. Yet, due to weaker bidding metrics, the Treasury has decided to play it safe and sell $1 billion less than what was suggested.

Suppose the US Treasury happens to follow the suggested increases in US Treasury notes and bond issuance in the first quarter of 2024. In that case, the auction size will rise to a record high, even above what markets used to absorb amid the COVID pandemic when quantitative easing (QE) was a supportive force for markets.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.