Yesterday’s US November CPI was the last piece of the monetary puzzle before today’s Fed decision, but it didn’t change the global picture. At 0.1% M/M and 3.1% Y/Y (headline) and 0.3% M/M and 4.0% for the core, the result was close to, if not slightly better than, expectations. The markets didn’t know what to make of it either. A first Pavlovian attempt by bonds to rally was immediately blocked, but the subsequent “rebound” in yields was also unconvincing.
US yields ended the day little changed, but a few basis points higher than just before the CPI release. German Bunds again outperformed with yields falling between 0.1 bp (2y) and 5.9 bp (30y). In particular, EMU/German LT yields are struggling to move off recent lows. The dollar briefly recouped intraday losses after the CPI, but couldn’t hold on to its gains. The DXY closed at 103.86 (from 104.1). EUR/USD also gained slightly despite a negative euro interest rate differential (closing at 1.0794). Both moves are technically insignificant.
The dollar’s ‘softness’ was likely inspired by constructive risk sentiment as the major US indices all closed at new 2023 highs. Also, something to watch out for in terms of ST inflation (expectations) and purchasing power: Oil fell sharply again (Brent $73 p/b). UK gilts outperformed sharply on weaker than expected UK labor data. Sterling’s recent comeback (especially against the Euro) was halted; EUR/GBP rebounded to the 0.86 area.
Asian equities are mostly trading in the red. China underperforms as markets are disappointed by the few signs of stimulus coming out of the annual work conference. Japan outperforms on a constructive BOJ Tankan report with both the large manufacturing (12 of 9) and non-manufacturing (30 of 27) indices improving more than expected. However, this won‘t be the deciding factor on whether the BOJ will change its policy in the near future.
Today’s trading will likely be a long countdown to the Fed’s decision. Anything other than an unchanged decision will be a massive surprise. Markets are keeping a close eye on the “guidance” from the summary of economic projections (dots). The Fed skipping the previous guidance of one more hike and sticking to 50bps of cuts through the end of 2024 could be a ‘steady-state’ scenario for markets. Also keep an eye on whether the Fed will raise the neutral rate.
In the press conference, we will be looking to see what Fed Chair Powell has to say about the significant easing of monetary conditions since the last meeting. Is the market now working against the Fed’s efforts to cool demand and dampen inflation? Perhaps the Fed governor will also emphasize the ongoing slack in economic activity, which could keep the supply-demand balance stretched for longer than expected. However, from the market’s perspective, the Fed will probably have to deliver a very hawkish message to trigger a real backlash.
