Fed holds rates and pushes back on March cut

The FOMC kept rates unchanged at the FOMC meeting ending January 31, holding the Fed Funds rate at 5.5% on the upper bound. The statement was revised to say that “economic activity had been expanding at a solid pace” and that the risks around its “employment and inflation goals are moving into better balance.” More explicitly, the FOMC state said that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

In his press conference after the meeting, Fed chair Jerome Powell said that he didn’t think the FOMC would have that “level of confidence by the time of the March meeting,” pushing against market expectations that a rate cut could happen as early as March. He also said that the Fed was “prepared to maintain the current target range…for longer if appropriate.” Chair Powell also noted that it was a “highly consequential decision to start the process” of easing rates and the Fed clearly doesn’t want to risk having to hike rates if inflation fails to sustainably decline. Market expectation for a rate cut in March has now fallen to less than 40% according to Fed funds futures.

The ADP report of private sector payrolls added just 107k jobs in January, down from 158k in a revised estimate for December. Hiring was broadbased across multiple sectors according to the ADP. Nonfarm payrolls for January will be released later this week with a market estimate for a 185k increase.

Inflation in Germany eased to 3.1% y/y for January, down from 3.8% a month earlier according to a preliminary harmonized print. On a monthly basis prices fell 0.2% from December thanks to falling costs for travel and clothing. Elsewhere in the Eurozone inflation in France declined to 3.4% y/y on a harmonized basis in January, down from more than 4% a month earlier. That was below the market expectations and was the lowest level since Q1 2022.

Saudi Arabia’s economy contracted by 0.9% in 2023 according to the latest estimates published by the General Authority for Statistics. For the year as a whole oil activities fell by 9.2% while the non-oil economy expanded by 4.6%. In Q4 there was a 16.4% y/y drop in oil production while the non-oil economy expanded by 4.3%.

The number of electricity accounts in Dubai rose by 5% in 2023 to 1.17m according to a statement from Mohammed Al Tayer, managing director and CEO of DEWA. The increase in accounts reflects population growth in the emirate with estimates of a daytime population of 4.8m. According to DEWA, total power capacity rose to 16,270 MW in 2023.

The Egyptian government has announced that it will curb expenditure on state projects as part of its economic reforms, with a 15% cut in budget appropriations for some state entities and a ban on external financing for new projects as the country grapples with an ongoing dollar shortage. Projects more than 70% complete will be given priority. There have also been reports that a breakthrough on the stalled IMF programme, both in terms of an FX adjustment and an enlargement of the IMF's support package, is imminent, although there has been no official confirmation on either of these matters. The CBE is due to hold its first MPC meeting of the year today, with a hold for the overnight deposit rate at 19.25% the consensus expectation. If there are developments with the IMF this could turn into a more 'live' meeting, however.

Today’s Economic Data and Events

• 09:00 IN HSBC PMI manufacturing Jan
• 14:00 EC CPI y/y Jan: forecast 2.7%
• 16:00 UK Bank of England bank rate: forecast 5.25%
• 17:30 US Initial jobless claims Jan 27: forecast 212k
• Egypt rate decision. Forecast: 19.25%

Fixed Income

• US Treasury yields closed lower overnight as while there was a push back on the timing of cuts, the FOMC was otherwise constructive on the outlook for the US economy and seemed to support that cuts were still coming. Yields on the 2yr UST fell almost 13bps overnight to 4.2067% while the 10yr UST yield fell 12bps to 3.9124% though both pulled back some of their deeper moves after Fed Chair Jerome Powell pushed back against market expectations for a March rate cut.
• Markets are still pricing in an aggressive level of easing by the end of the year with as many as 5-6 cuts by December. We believe that is still overly aggressive given the momentum the US economy is carrying into 2024 and the risks to inflation moving higher again.

FX

• Currency markets closed broadly lower against the dollar overnight as the Fed showed no inclination for an early move in March. EURUSD fell by 0.3% to 1.0818 while GBPUSD nudged lower, down by about 0.1% to 1.2688. Japanese yen was the only outperformer with USDJPY falling by 0.5% to 146.92 in favour of the yen.
• Commodity currencies were resolutely weaker with USDCAD up 0.3% at 1.3435 while AUDUSD fell 0.5% to 0.6568 and NZDUSD dropped 0.3% to 0.6117.

Equities

• The hold from the Fed at the January FOMC helped to push equity markets lower overnight. The Dow Jones fell 0.8% while the S&P 500 gave up 1.6% and the NASDAQ dropped 2.2%. European markets were also weaker with the FTSE lower by almost 0.5% and the EuroStoxx down 0.3%.
• Asian markets have opened mixed today with the Nikkei down by 0.8% while the Hang Seng has added more than 1%.

Commodities

• Oil prices dropped overnight in line with a fall in risk assets more generally. Brent futures fell 1.4% to USD 81.71/b while WTI sank more than 2.5% to USD 75.85/b. EIA data showed a recovery from weather-affected production in the US to 13m b/d, up 700k b/d on the week, while commercial crude stocks expanded by 1.2m bbl. Gasoline inventories were higher while distillate stocks declined.