BREAKING: The Federal Reserve on Wednesday held interest rates steady as expected but signaled that it still plans multiple cuts before the end of the year.
FED HOLDS BENCHMARK RATE IN 5.25-5.5% TARGET RANGE - BBG *FOMC MEDIAN FORECAST SHOWS 75 BPS OF RATE CUTS IN 2024 TO 4.6% *FED REPEATS WAITING FOR GREATER CONFIDENCE ON INFLATION TO CUT As expected, the Fed kept the Federal Funds Rate unchanged. The main news is that the 2024 median rate forecast in the new Federal Reserve dot plot remains UNCHANGED! The Fed continues to expect three rate cuts (-75BPS) for 2024 ! Fed Officials median view of Fed funds rate at end of 2024 4.6% (prev 4.6%). Fed projections show only one official sees more than three 25 bp rate cuts in 2024. Fed now only sees 2 rate cuts in 2025 and fewer cuts in 2026. Fed made only one change to the FOMC statement: Thus is in January: "Job gains have moderated since early last year but..." replaced by this in March: "Job gains have remained strong and..." The projected change in real GDP for 2024 was 2.1% in the March projection, up from 1.4% in December. Core PCE inflation projections also ticked up to 2.6% from 2.4%.. Fed says inflation "has eased but remains elevated". Fed does not expect rate cuts until "greater confidence" inflation is moving to 2%. Market reaction: Equity markets are rallying after the FOMC announcement: The S&P 500 has officially broken above 5200 for the first time in history. The dollar is weakening and US Treasury yields are stable (the 10 year initially lost 5 basis points). Our take: Markets are rallying on the initial headlines from this Fed rate decision. Primarily because Fed projections for 3 rate cuts in 2024 have been reaffirmed. Indeed, the risk of a hawkish surprise (lower dot plots for 2024) was quite elevated ahead of the FOMC decision based on recent economic activity data (Atlanta Fed GDPNow currently at 2.5% for Q1 24). The fact that the Fed keeps 2024 DOTS unchanged was the best scenario for the market. The two objectives of the Fed (maximum employment and stable prices) are (almost) perfectly reached. The Fed can relax and afford to “wait-and-see” before eventually recalibrating (most likely in June). Note that Powell’s press conference will also be important for the nuances and context around the potential adjustments to dots and economic projections. In terms of portfolio positioning, we remain constructive on equities but more cautious on fixed income. We keep some allocation to Gold.
SNB could surprise with a rate cut as banks turn against Franc
A handful of banks expect Switzerland’s policymakers will go against forecasts and cut interest rates in their first decision of the year.
Barclays, Citigroup, Julius Baer and others are among the few predicting the Swiss National Bank will deliver a reduction aimed at safeguarding the economy from potential currency strength.
Source: Bloomberg
US Rate-cut expectations were revised downward last week.
For the first time this year, markets now only see 3 interest rate cuts in 2024. This also happens to be the first time that markets align with the latest Fed guidance. Odds of a rate cut in this week are down to 2% and odds of a rate cut in May are down to ~7%. Just 3 months ago, markets saw SEVEN rate cuts in 2024 with rate cuts beginning this month. Source: The Kobeissi Letter
Financial stress is the lowest since the Fed began raising rates, which begs the question -- why cut this year? 🤔
Source: Markets & Mayhem, St Louis Fed
Some interesting quotes by Donald Trump about rates, the dollar, macro and gold thru Ronnie Stoeferle:
- "I am a low interest rate person. If we raise interest rates and if the dollar starts getting too strong, we're going to have some very major problems." - "This is the United States government. First of all, you never have to default because you print the money." - "The Dollar is too strong. Our companies can’t compete with them now because our currency is too strong. And it’s killing us." - "The golden rule of negotiation: He who has the gold makes the rules." - "We used to have a very, very solid country because it was based on a gold standard. We don’t have the gold. Other places have the gold." - "I have been complaining about currency devaluations for a long time. I believe that we will all eventually, and probably sooner than people understand or think, be on a level playing field because that’s the only way its fair."
As expected, the ECB lefts rates unchanged.
The European Central Bank approach continues to follow a data-dependent approach in determining rate path. THE STATEMENT • Inflation forecasts by ECB staff have been lowered, especially for 2024, largely due to reduced energy price pressures. Inflation is now expected to average 2.3% in 2024 and to stabilize around 2.0% in the following years; core inflation projections also revised downwards. They nevertheless say that domestic price pressures remain high, partly due to wages. They say that domestic price pressures remain high, partly due to wages. • Growth projections for 2024 have been downgraded to 0.6%, with a gradual recovery anticipated, leading to 1.5% growth in 2025 and 1.6% in 2026. • The ECB believes current interest rates, if maintained, will significantly contribute to reducing inflation and has committed to keeping rates at restrictive levels as needed. MARKET REACTION • EUR/USD is weaker on the news (to 1.0875) and EUR rates extend their move lower (they were already down every day this week, and prior to the ECB announcement). German 10y is down -7bp to 2.25% at the time we write • Rate cuts expectations are slightly increased for this year, but not massively so far (still four 25bp rate cuts by the end of the year when rounding the probabilities) OUR TAKE • Overall, this is a rather dovish statement for now - let see if Lagarde press conference will reinforces the dovish reading or if she counterbalances the message from the downward revisions on growth in inflation. Source: chart: Bloomberg
U.S. Households are now spending a record $573.4 billion on non-mortgage interest payments which for the first time in history is roughly the same as mortgage interest payments.
source : Barchart
With Powell's remarks, Wall Street's hopes for a March rate cut (once 97%) officially hit 0.
With Powell's remarks today, Wall Street's hopes for a March rate cut (once 97%) officially hit 0. "Maybe he should consider using models that have been consistently accurate, instead of listening to those who give him 'different answers' (his words) that have been consistently wrong." From : Mitchel Krause, hedgeye : With Powell's remarks today, Wall Street's hopes for a March rate cut (once 97%) officially hit 0. "Maybe he should consider using models that have been consistently accurate, instead of listening to those who give him 'different answers' (his words) that have been consistently wrong." From : Mitchel Krause, hedgeye :https://app.hedgeye.com/insights/147337-mitchel-krause-how-wall-street-s-hopes-for-march-cuts-quickly-collaps?type=guest-contributors
