19 December 2024
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Fed cuts by 25bps

Daily Outlook - 19 December 2024

By Daniel Richards

The US Federal Reserve cut its benchmark Fed funds rate by 25bps at its final FOMC meeting of the year yesterday, taking the upper bound down to 4.5% and meaning that a cumulative 100bps of cuts has now been implemented since the initial 50bps move lower in September. The cut was well anticipated, meaning that the focus was on the post-meeting press conference by Jerome Powell and the revised dot plot projections, both of which were more hawkish than seen previously. Powell said that the central bank was now ‘at, or near a point’ to pause or slow its easing, with the focus now firmly back on inflation as the Fed’s year-end projection has ‘kind of fallen apart’ and progress has been ‘sideways.’ While Powell still sees further rate cuts coming, he cautioned that the pace would be far more cautious.

The inflation projection was one key change in the revised quarterly Summary of Economic Projections released by the Fed yesterday, with PCE inflation now forecast at 2.5% y/y at end-2025, up from 2.1% at the September meeting. Core PCE has been similary raised to 2.5%, from 2.2% previously. On the back of this, the median forecast by FOMC members is now for the upper bound of the Fed funds rate to end 2025 at 3.9%, implying just two further 25bps cuts next year, in contrast to the 3.4% projected back in September. The growth and unemployment forecasts are little changed by contrast, with GDP forecast to grow 2.1% next year, up from 2.0% previously, while unemployment is projected at 4.3% at year-end, from 4.4%.

The Bank of Japan kept its monetary policy on hold as expected at its December meeting, leaving its benchmark rate at around 0.25%. There was one dissension, with one policy maker calling for a 25bps hike to 0.5%, but the bank statement cautioned ‘high uncertainties surrounding Japan’s economic activity and prices’ which made a hold more sensible.

CPI inflation in the UK came in in line with expectations in November at 2.6% y/y, up from 2.3% the previous month, while on the monthly measure price growth slowed to 0.1%, from 0.6% m/m in October. This marked the fastest pace of annual inflation since March this year and takes it some way above the Bank of England’s target 2.0% rate. Core inflation rose to 3.5% y/y, up from 3.3% in October but still slightly lower than the predicted 3.6%. Higher prices for petrol, clothing, and groceries alongside an increase in tobacco duty fueled the acceleration, offset slightly by lower air fares. The Bank of England is expected to hold the bank rate steady at 4.75% today, but the uptick in inflation, following on from the upside surprise in wage growth data released earlier this week, has complicated the bank’s easing path for next year.

Today’s Economic Data and Events

11:00 UK CPI inflation, % y/y, November. Forecast: 2.6%

23:00 US FOMC rate decision. Forecast: 4.50%

Fixed Income

  • USTs sold off further following the hawkish messaging from the Fed, with yields rising by double-digit moves. The 2yr added 11bps to 4.3545%, while the 10yr yield ended the day at 4.5140%, up 12bps.

FX

  • The dollar index closed up 1.0% against its basket of peers yesterday to its strongest in more than two years, with gains broad based against all the major currency pairs after the hawkish hold by the FOMC.
  • NZD and AUD were notable losers, ceding 2.3% and 1.9% against USD respectively, but there were large moves by the G3 currencies also. GBP closed down 1.1% at 1.2574, while EUR closed 1.3% lower at 1.0353.
  • JPY lost 0.9% against the dollar yesterday to close at 154.80, and is weakening further following the BoJ’s decision to hold rates this morning, down 0.5% at the time of writing.

Equities

  • The hawkish messaging from the Fed weighed heavily on equity markets yesterday, with sharp declines in interest-rate sensitive tech growth stocks in particular. The NASDAQ ended the day 3.6% lower, with the S&P 500 and the Dow Jones both dropping 3.0%, the worst day for the S&P since August.
  • There was less movement in Europe ahead of the decision, with the DAX closing down just marginally, the FTSE 100 adding 0.1% and the CAC gaining 0.3%.
  • Locally, the DFM fell 0.8%, offsetting some of its strong gains earlier in the week. The ADX added 0.3% and Saudi Arabia’s Tadawul ended the day 0.1% higher.

Commodities

  • Oil prices closed higher yesterday, with Brent futures up 0.3% at USD 73.4/b, while WTI added 0.7% to USD 70.6/b as EIA data showed a fall in crude inventories to the tune of 934,000 bbl.

Written By

Daniel Richards Senior Economist


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