FOMC minutes point to rates remaining elevated for "some time"

Minutes from the 12-13 December US Federal Reserve Bank meeting show that while committee members were increasingly optimistic about the path of inflation having shown “clear progress”, they also continued to believe that restrictive monetary policy would be needed for “for some time”. The minutes pointed a willingness amongst FOMC members to begin cutting rates in 2024, although not to the extent and speed implied by futures traders, who have been pricing in six cuts starting as early as March. This is despite the FOMC’s own updated dot plot suggesting three cuts totaling 75bps in 2024. FOMC members have since cautioned against assuming rate cuts are set in stone, including Richmond Fed president, Thomas Barkin, warning on Wednesday that the Fed’s job to quell inflation was not yet done.

The US ISM manufacturing PMI ticked up marginally in December but nonetheless remained in contractionary territory for a 14^th consecutive month, with a value of 47.4 from 46.7 in November. The uptick in the headline measure was driven by rises in the production and employment sub-indices but it is unclear to what extent these measures will have been affected by a rebound in auto production after the end of the UAW strike.

Job openings in the US declined in November, falling to 8.79m from 8.85m in October, with the reading also falling below consensus expectations. There were other indicators of a cooling labour market in the JOLTS report, with the private job quits rate falling to 2.2%, suggesting that workers feel less confident about their ability to find alternate employment. The job hires rate also declined to 1.5%, its weakest levels since 2014 apart from during the Covid pandemic.

Turkey’s annual CPI inflation came in at 64.8% y/y in December, up from 62.0% in November and broadly in line with the consensus prediction of 65.0%. Prices were up 2.9% from the previous month, compared with a 3.3% m/m gain in November. Annual core inflation ticked up modestly to 70.6% y/y. The acceleration in headline price growth is in line with the central bank’s predictions, with annual inflation set to rise back to 70.0% before it slows once more. The TCMB implemented another rate hike at its last MPC meeting of the year on December 21, although it did note that ‘inflation expectations and pricing behavior started to show signs of improvement’. However, an upcoming 50% hike to the minimum wage, and PPI inflation still at 44.2% y/y both pose upside risks.

The Caixin China services PMI rose to a four-month high in December, increasing to 52.9 from 51.1 in November. This contrasts with the official December services PMI index, published at the end of 2023, showing that the services sector remained in contractionary territory. The Caixin composite PMI measure also rose in December, rising to 52.6 from 51.6 the month prior.

Today’s Economic Data and Events

• 11:45 FR CPI (Dec): forecast 3.7% y/y
• 17:00 GE CPI (Dec): forecast 3.7% y/y
• 17:15 US ADP employment change (Dec): forecast 121k
• 17:30 US Initial jobless claims (Dec 30): forecast 216k

Fixed Income

• Moves in US Treasury yields were mixed on Wednesday, following the release of the FOMC meeting minutes. The yield on the 2yr rose marginally, gaining 1bps to 4.3305%. The yield on the 10yr declined 1bps to end the day at 3.9162% after briefly rising above 4% earlier in the day.
• The 2yr Gilt yield rose 5bps to 4.085%, while the 10y Gilt yield was broadly unchanged 3.6367%. Outside of the United Kingdom, there were broad-based declines in European bond yields on Wednesday. The 10yr Bund yield dropped 4bps to reach 2.066%.

FX

• The US dollar pared gains against a basket of major peers on Wednesday, with the dollar spot index ending the day 0.2% higher, after having risen as much as 0.4% in earlier trading. EURUSD fell 0.18% to 1.0922 and USDJPY gained 0.9% to reach 143.29. GBPUSD, in contrast, gained 0.4% to 1.2665.
• The dollar was also stronger against major commodity currencies. AUDUSD fell 0.4% to 0.6732, NZDUSD fell 0.1% to 0.6247, and USDCAD rose 0.2% to 1.3353.

Equities

• US equities continued their lackluster start to 2024, ended lower on Wednesday. The weakness was once again driven by declines in tech stocks. The Dow Jones declined 0.76%, the S&P 500 fell 0.8%, and the Nasdaq dropped 1.18%.
• There were also losses on major European equity indices, with the Eurostoxx 50 declining 1.43%, the CAC 40 falling 1.58%, and the Dax dropping 1.38%. The FTSE 100 also fell by 0.51% on the day.
• Locally, the DFMGI dropped 0.33%, while the ADXGI gained 1.6%.

Commodities

• Brent and WTI futures both rose sharply on Wednesday, on the back of rising geo-political tension. Brent rose 3.11% to USD 78.25/b and WTI gained 3.3% to USD 72.7/b. In addition, there are concerns that production from Libya’s largest oil field may be shut due to protests in the North African producer. The Sharara field produces roughly 300k b/d and Libya’s national oil company warned that it may be stopped if protesters’ demands are not met.