Weekly | FED: Double Talk
Your weekly summary with the most important news for your investments.
Your weekly summary with the most important news for your investments:
Impact on Financial Markets.
Interest Rate Movements.
Inflation and Future FED Decisions.
Last Wednesday, after the FEDeral Reserve (FED) published its macroeconomic estimates for the following years, projecting a reduction of almost 100 basis points in the monetary policy rate for the year 2024 (currently at 5.5%), part of the liquidity that was being sheltered in the high short-term interest rates, went in search of equities and medium to long-term sovereign fixed income. This led to:
The Dow stock index closed for the first time in its history above 37 thousand points climbing +2.9% in the week.
The S&P 500 approached its highest historical level, returning +2.5%.
The Nasdaq will return another +2.8% for the week.
With this, the three indices accumulate year-to-date gains of +12.5%, +22.9% and +41.5%, respectively.
However, and as pointed out in an article published over the weekend by The Wall Street Journal, the seven most relevant technology companies in the S&P 500 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) have returned an average of +75% and the rest of the other 493 companies in the index have only returned +12% on average, so that today these seven technology companies represent almost 30% of the overall index in market capitalization.
At the same time, we saw how the 10-year sovereign rate fell -32 basis points during the week to close at 3.91% (whereas in mid-October it was hovering around 5%). The lower the interest rate, the higher the price of treasury bonds. However, the FED had a double discourse that was accompanied by a series of disdainful statements from its representatives arguing that it was still too early to talk about potential interest rate cuts, something that completely contradicts the projections of the issuing institution itself. In the case of the European Central Bank and the Central Bank of England, which kept their interest rates unchanged, the speeches were considerably more cautious as inflation in those countries remains high.
Already this week, which will be the last week with high transactional volumes, as investors reposition their investment portfolios going into the year-end break, not only will companies such as Carnival, FEDex, General Mills and Nike be reporting their quarterly results, which will give us a glimpse of consumer behavior, but PCE inflation data, the FED's preferred reading, will also be released. For now, headline PCE inflation is expected to be in the range of 2.8% (from 3%) and core PCE inflation, which excludes food and energy prices, is expected to ease marginally to 3.4% (from 3.5%). If those readings are ratified, it is very likely that the FED will have sufficient degrees of freedom to begin the interest rate down cycle, provided that the price of oil and agricultural commodities remain stable going into 2024. For now, the price of oil, as measured by the WTI, continues to pivot around US$70 per barrel, despite the problems that have been brewing in the Suez Canal as a result of attacks on merchant ships by the Houthi terrorist group, which could generate a secondary problem in the distribution chains. Shipping companies Hapag Lloyd, Maersk and MSC are already rerouting their routes to avoid the Suez Canal.
But let us dwell briefly on the FED's double talk.
On the one hand, already in the question and answer session following the decision to not only keep the monetary policy rate at 5.5% and deliver projections of an average rate of 4.6% for the coming year, the FED chairman tried to argue that it was too premature to talk about the timing of the tapering.
Its chairman, Jerome Powell, argued as follows:
"And I would just say this, we're seeing, you know, strong growth that seems to be moderating. We're seeing a labor market that's coming back into balance by many measures, and we're seeing inflation actually moving forward. These are the things that we've been wanting to see. We can't know, we still have a ways to go. No one is declaring victory. That would be premature and we can't guarantee this progress. So we're moving carefully in making that assessment of whether we need to do more or not. And that's really the question we're on, but of course, the other question, the question of when it will be appropriate to start reducing the amount of policy restraint in place, that's beginning to loom and that's clearly a topic of discussion in the world and also a discussion for us in our meeting today."
Having argued that here are a couple of comments that sought to temper market optimism from other FED representatives in recent days: the New York FED president argued last Friday:
"We're not really talking about rate cuts at this point."
Followed by comments from the Atlanta FED president noting that a rate cut was not imminent and that it could only be by the third quarter of 2024. The Chicago FED president over the weekend argued:
"It's too early to declare victory...we've come a long way. So the thing to remember is that every time in the past that the FED or other central banks around the world have had to significantly reduce inflation, it has always been accompanied by a major recession."
Finally, in this morning's hours the Cleveland FED president noted:
"The next phase is not about when to cut rates, although that is where the markets are. It's about how long we need monetary policy to remain tight to make sure inflation follows a sustainable and timely path back to 2 percent. The markets are a little bit ahead of the curve."
In conclusion, it is clear that the FED wanted to double-speak by projecting a policy rate cut going into 2024, allowing the excess liquidity that was parked to exit in pursuit of new returns, however, it would appear that they now have to argue that inflation may still generate a headache. In addition, it will now be necessary to know if the demand is reflected in the sales and profits of the companies to justify the market valuations.
To all our readers, have a very happy holiday season - Merry Christmas and may the year 2024 be full of blessings, achievements, health and peace.
This Week
Monday (December 18)
Quarterly Reports
Heico Corporation
Ennis, Inc.
Value Line, Inc.
MariaDB plc
Actinium Pharmaceuticals, Inc.
Tuesday (December 19)
Quarterly Reports
Accenture plc
FEDEx Corporation
FactSet Research Systems Inc.
Worthington Enterprises, Inc.
Steelcase Inc.
Economic Reports
Preliminary Building Permits Report
Wednesday (Dec. 20)
Quarterly Reports
Micron Technology, Inc.
General Mills, Inc.
Toro Company (The)
BlackBerry Limited
Winnebago Industries, Inc.
Financial Reports
Current Account Report
Thursday (December 21)
Quarterly Reports
Nike, Inc.
Cintas Corporation
Paychex, Inc.
Carnival Corporation
Aegon Ltd.
Economic Reports
Gross Domestic Product Quarterly Growth Report
Gross Domestic Product Price Index Quarterly Change Report
Philadelphia FED Manufacturing Index Report
Friday (December 22)
Quarterly Reports
SIFCO Industries, Inc.
NuZee, Inc.
Economic Reports
Monthly Change in Consumer Price Index Report
Perishable Goods Order Report
Personal Income Monthly Change Report
Personal Spending Monthly Change Report
Now you have more information about your investments. See you next week with more news.
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