FOMC slows the pace of rate hikes

• The FOMC raised the fed funds target range by 50bps at its meeting yesterday, taking the upper bound to 4.50%. This was in line with our long-held expectations, and the consensus outlook was also for a slowdown from the straight run of four 75bps hikes at the meetings prior to this one. The lower-than-expected US inflation print for November released the previous day made the result even more likely. With little surprise in the rate decision, the focus was on Jerome Powell’s press conference and the revised predictions from officials for the coming year. Powell was at pains to maintain a hawkish tone, and while he welcomed the likelihood that inflation has now peaked, he stressed that ‘we still have some ways to go’ and that rate cuts will not come until inflation is coming down in a sustained way towards its target level and ‘that will be some time.’
• Powell’s comments were supported by the revised ‘dot plot’ of FOMC member predictions for rates, which showed that there remained support for further tightening next year as the end-2023 rate rose from 4.6% to 5.1%, suggesting 75bps more of hikes yet to be implemented before coming down once more in 2024. The higher terminal Fed Funds rate was justified by the upward revision to the Fed's inflation forecasts, with core PCE inflation next year now expected to reach 3.5% in Q4 up from 3.1% previously, before falling to 2.5% by late 2024 (2.3% previously). The Fed downgraded their growth forecast next year to just 0.5% next year, from 1.2% forecast in September, and revised up their forecast of the unemployment rate to 4.6% from 4.4% previously on the back of higher projected interest rates. The market remains more dovish on the rate outlook, with traders pricing in a peak Fed Funds rate of 5.0% in H1 2023 followed by two rate cuts in H2 taking the benchmark back to 4.5% by the end of next year.
• UK CPI inflation slowed to 10.7% y/y in November, down from 11.1% in October and slower than the consensus projection of 10.9%. Core inflation also slowed, from 6.5% to 6.3%. Coming ahead of the Bank of England’s rate decision later today the slowdown gives the bank room to implement a hike of 50bps rather than the 75bps move seen at the last meeting, but with price growth still in double digits the bank is not about to end its hikes just yet.
• Chinese retail sales contracted 5.9% y/y in November, exceeding expectations of a 4.0% drop. Sales were 0.1% lower than in October. Industrial production was also weaker than expected as it expanded 2.2% y/y, missing predictions of 3.5% growth, and the jobless rate rose to a six-month high of 5.7%. Rising Covid-19 cases and onerous restrictions on activity have weighed on the Chinese economy in recent months. With restrictions starting to ease there could be a rebound, although this will likely be tempered by a surge in cases.

Today’s Economic Data and Events

• 16:00 UK Bank of England rate decision. Forecast: 3.50%
• 17:15 Eurozone ECB rate decision. Forecast: 2.50%
• 17:30 US initial jobless claims, week to December 10. Forecast: 232,000%

Fixed Income

• Yields on 10y USTs rose as high as 3.556% just after the Fed policy announcement but dropped back shortly after. They closed down 2bps yesterday and at the time of writing this morning 10y Treasury yields were up 2bps to 3.497%.  
• UK 10y gilts rose 10 bps to 3.301% on the back of the UK November inflation print which showed inflation dropped to 10.7% y/y from 11.1% in November. The BoE meets later today and is widely expected to raise rates by a further 50bps to take Bank rate up to 3.5%.
• The ECB is also expected to raise rates at their meeting later today. As with the Fed and BoE meeting, markets are anticipating a 50bps rise.

FX

• The Dollar traded weaker against most major currencies, as the Fed slowed its pace of tightening to a 50bps point hike.
• Sterling reached a 6-month high yesterday, closing 0.49% higher at 1.2426, while EUR closed up 0.46% against the Dollar to reach 1.0682.

Equities

• US equity markets fell back yesterday after a 2-day rally following the Fed policy decision. The NASDAQ, Dow Jones, and the S&P 500 fell 0.76%, 0.42% and 0.61% respectively.
• Asian markets also fell back yesterday after having been broadly positive on Tuesday, with the Hang Seng falling 1.69% and the Nikkei down 0.27%.
• Locally, the DFM closed up 0.32%. Saudi Arabia’s Tadawul added 0.26%, as it continued to benefit from a rise in oil prices.

Commodities

• Oil prices rose again yesterday with both Brent and WTI futures ending the day up 2.5% at USD 82.7/b and USD 77.28/b, respectively.
• A section of the North American Keystone pipeline was reopened yesterday, after having been shut last week due to an oil spill.
• The EIA reported that US crude stockpiles rose more than 10 million barrels last week, the most since March 2021.  

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