The FP Markets Research Team produces First Light News during the early hours of the European session, a daily Market Briefing that helps ensure traders and investors are up to date in the macro space for the day ahead.

Good morning.

Yesterday’s highlight event observed the Fed stand pat on rates for a third successive meeting, as widely expected. This consequently leaves the Fed Funds target range at 5.25%-5.50%.

However, the decision to hold the line came with updated forecasts: Fed officials project three rate cuts in 2024, with a rate hike appearing firmly off the table. As evident from the Fed’s dot plot (below), Fed members forecast the Fed Funds target range to be 4.50%-4.75% next year or 75bps of cuts. Market pricing, nonetheless, now projects around six rate cuts by the end of 2024, with the first 25bp rate cut priced in for as soon as March (see Fed Funds futures pricing below the dot plot).

Regarding economic projections from the Fed, core PCE inflation fell from 3.7% to 3.2% for 2023, from 2.6% to 2.4% in 2024 and from 2.3% to 2.2% in 2025. Unemployment remained unchanged for 2023, 2024 and 2025 at 3.8%, 4.1% and 4.1%, respectively, while real GDP elbowed higher for 2023 to 2.6% from September’s projection of 2.1% and in 2024, real GDP is projected to drop to 1.4% from 1.5%.

The accompanying post-rate statement also saw guidance soften, removing/adding a handful of text, including the addition of the word ‘and’ in the sentence: ‘In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent.’, as well as altering November’s sentence from, ‘Inflation remains elevated’ to, ‘Inflation has eased over the past year but remains elevated’.

Thirty minutes following the rate announcement, the presser saw Fed Chair Jerome Powell declare that the Fed Funds rate is at or near its terminal level, signalling an end to one of the most aggressive rate hiking regimes in many decades and adding more fuel to the fire that a Fed pivot is nearing.

Looking Ahead

Today will welcome the Bank of England (BoE) and the European Central Bank (ECB) at midday and 1:15 pm GMT.

The BoE is widely expected to remain on hold, leaving the Bank Rate at 5.25%. For 2024, OIS swaps are pricing around 120bps of cuts, of which the first 25bp cut is expected in May. For the ECB, markets and economists expect the central bank to also hold steady at today’s meeting. According to OIS pricing, however, the ECB is expected to cut by around 150bps in 2024, with a 90% chance that the first 25bp rate cut will be in March.

Additional data to be aware of today, of course, is retail sales numbers and the weekly unemployment claims from the US at 1:30 pm GMT. The latter is largely expected to remain unchanged, while retail sales on a headline level for November is also expected to remain unchanged at -0.1% (estimate range is between 0.4% and -0.3%), and the core measure for the same period—excludes autos—is forecasted to contract to -0.1% from 0.1% in October.

Markets

Following the Fed’s rate decision, the market reaction was broad, with all major asset classes feeling it. Stocks and bonds rallied following the release, with front-end treasuries posting strong gains. The US Dollar Index fell 1.0% in the hour, with G10 peers rallying.

The Dow Jones Industrial Average surpassed the level of 37,000 for the first time in history, as it bounced 512 points (+1.4%) to 37,090, a record close. The S&P 500 rose 63 points (+1.4%) to 4,707 and the Nasdaq 100 climbed 208 points (+1.3%) to 16,562.

The commodities space saw spot gold (XAU/USD) rally strongly following the Fed’s rate announcement, lifting the precious metal firmly north of the widely watched $2,000 barrier.

The major crypto BTC/USD also reclaimed lost ground yesterday, rebounding from key daily support at $41,500 and fast approaching recent peaks of $45,000. Continued buying could see the unit attack daily resistance from $43,828 and attempt to take on nearby daily resistance at $45,525.

(Trading View)

G10 FX space as of 09:20 am GMT:

(Trading View)

Thanks for reading. Have a great day.

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