The Fed stuck to its hawkish stance
They are likely to continue to talk tough, but what truly matters now is how inflation and the job market continue to evolve
Despite the undershoot in the US inflation data from the day before, the US Federal Reserve stuck to its hawkish rhetoric after hiking interest rates by 0.5% as expected, in its last policy meeting of the year.
The Fed’s median projections for interest rates next year are for it to peak at 5.1%, higher than the 4.6% it projected in the September policy meeting. However, the market continues to disbelieve the Fed, as the market continues to price for a peak interest rate of 4.87% next year, and for rate cuts to begin in the second half of next year.
As we expected, the Fed has continued to talk hawkishly because to do otherwise would be to invite the market to rally and loosen monetary conditions, which is contrary to what they’re trying to achieve with their interest rate hikes thus far. They are likely to continue to talk tough, but what truly matters now is how inflation and the job market continue to evolve in the weeks ahead.
Trading Tip
Reading Between the Lines
When interpreting speeches and statements made by important figures such as Central Bankers and other policymakers, it is important to be able to understand their underlying motive instead of taking their words at face value.
Often, people will only see the words of what the speaker said their institution will do. While these statements depict what is at hand, it often does not dictate what the institution will do in the future. It is important to also note the subtle nuances made in their statements and the choice of words used that are carefully used to express the stance they are having.
While the nuances may not be obvious, using the current context to interpret their statements will help with deciphering the underlying meaning.
For example, with regards to the current situation. The best course of action the Federal Reserve can take will be to talk tough on inflation to prevent the market from acting on expectations of a more dovish Fed ahead. However, it does not mean the Fed will carry on being tough if the economic situation starts to suffer too badly, or if inflation continues to slow at a much faster than expected pace.
Day Ahead
The Chinese retail sales print is expected to shrink further to -3% YoY in November from -0.5% in October. The Chinese unemployment rate is expected to remain at 5.5%.
The Bank of England and European Central Bank are both expected to raise rates by +0.50%. The comments from the policymakers after the hike will likely cause some volatility in the market.
Trading Plan
1. Currencies:
EUR - Neutral. For now, stay on the sidelines.
CNH - Bullish. Short USDCNH. Stay patient for now.
2. Commodities:
Uranium & Energy - Stay patient and stay invested.
3. Stocks:
US Stock Index: Stocks ended the day on a weak note because of higher projection of terminal policy interest rates by the US Federal Reserve. Expect the market to remain in a range for now.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: Comments from US Federal Reserve officials about the future path of interest rates and inflation will affect risk sentiment.
What Happened Yesterday
UK inflation rate showed that prices rose 10.7% Year-on-Year (vs 10.9% expected) down from 11.1% last month. The core index, which excludes food and energy, came in at 6.3% (vs 6.5% expected and prev). While inflation seems to be coming off, the print remains too high and the Bank of England should continue to talk hawkishly today.
The US Federal Reserve hiked interest rates by +0.50% as expected, the highest level in 15 years. The decision was made unanimously. The Fed dot plots showed that the median projections for the Fed fund rates are expected to reach 5.1% in 2023 (higher than the 4.6% in September), 4.1% in 2023 and 3.1% in 2025. The Federal Open Market Committee statement is almost identical to the one released in November except a change in the target range.
In his press conference, Federal Reserve Chairman Powell reiterated the same message of having to make sure inflation does not become entrenched and that the Federal Reserve will stay the course until the fight against inflation is done. He also added that the recent downtrend in inflation data is not sufficient to warrant them to hold back on interest rates hike and more evidence is needed. As expected, the Fed stuck to their hawkish stance as the policymakers are wary of the market reading too much into the softening of inflation and starting to price for interest rate cuts for next year.
The US Treasury yield curve remains inverted with the difference between the 2-year and 10-year bond yields now at 0.74%. Treasury yields tried to move higher following the Federal Reserve monetary policy decision with a +0.12% move in the 2 yr yields but the move faded quickly. The 2yr yield inched higher by +0.01% to 4.23% while the 10yr yield fell -0.02% to 3.49% on the day.
The US stock futures stayed relatively contained during the Asian and London trading session, oscillating within the 4040 and 4060 level.
However, there was a +0.5% spike in the S&P 500 futures upon the US stock market open. The US stock market then gradually drifted higher from that level until the Federal Reserve policy decision dampened risk sentiment, causing a -1.47% move in the S&P 500. The S&P 500 was down -0.61% on the day (intraday high: +0.85%, intraday low: -1.34%). The Dow Jones fell -0.42% (intraday high: +0.84%, intraday low: -1.19%) while the Nasdaq decreased -0.79% (intraday high: +0.90%, intraday low: -1.83%).
The crypto market had similar price action as the US stock market but finished the day relatively changed. Bitcoin inched higher by +0.4% on the day while Ether was down -0.5% (BTC intraday high: +0.7%, intraday low: -1.0%; ETH intraday high: +0.2%, intraday low: -2.8%).
Headlines & Market Impact
US to remove some Chinese entities from red flag list soon: US Official
Notable Snippet: The Biden administration plans to remove some Chinese entities from a red flag trade list, amid closer cooperation from Beijing, a US official told Reuters on Wednesday (Dec 14).
The plan to remove them from the so-called "unverified" list, which is expected to come soon, is thanks to greater willingness from the Chinese government to permit US site visits, the person said.
The Biden administration is also expected to add Chinese memory chipmaker YMTC to a tougher export control list as soon as this week, according to another person familiar with the matter.
The removals mean US exporters will no longer have to conduct additional due diligence before sending goods to them.
What we think: This is a positive development and could mean that US-China relations are on the mend.
EU wants to 'reconnect' with Southeast Asia amid Ukraine war
Notable Snippet: EU leaders meet their counterparts from Southeast Asia for a summit in Brussels on Wednesday (Dec 14), looking to bolster ties in the face of the war in Ukraine and challenges from China.
Chinese claims over the South China Sea have set it against some neighbours and sparked fears in Europe over trade flows through the key global thoroughfare.
But China remains the biggest trade partner for ASEAN and many in the region are wary of distancing themselves from their giant neighbour.
EU nations are pushing to diversify key supply chains away from China as the war in Ukraine has highlighted Europe's vulnerabilities.
The EU is set to unveil investments that could be worth 10 billion euros (US$10.6 billion) for the region under its Global Gateway strategy designed as a counterweight to China's largesse.
What we think: The EU wanting to engage with South East Asia will create more opportunities in the region.
PayPal Working With Crypto Wallet MetaMask to Offer Easy Way to Buy Crypto
Notable Snippet: PayPal will integrate its buy, sell and hold crypto services with MetaMask Wallet as the companies look to broaden users' options to transfer digital assets from their platforms, the companies said Wednesday.
According to a press release, the partnership between the payments firm and MetaMask developer ConsenSys is intended to enable users to select their PayPal accounts as a payment option to buy ether (ETH) from within the MetaMask app. The offering is designed to facilitate seamless purchases and transfers of ether from PayPal to MetaMask.
MetaMask intends the offering to help bring more users into the Web3 ecosystem at a time when the sector is looking for a way forward during the crypto winter.
What we think: The crypto market continues to draw the attention of mainstream finance despite the crypto winter. This augurs well for the industry as more adoption will continue to onboard more users into the crypto ecosystem.
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord