The Fed raised rates by 75 basis points and to the naked eye, the statement was longer than normal which just on the surface said “there is a shift here”. Looking at the words, the biggest inclusion read:
- In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments
The dollar moved lower, stocks move higher, yields move lower. Clearly, the Fed’s acknowledgment that the cumulative tightenings and lags were indeed something that the Fed was concerned about. Traders saw 50 basis points in December vs. 75. They could see the finish line for the tightening cycle.
Admittedly, that perception still involved 50 basis points in December and perhaps another 25-50 basis point in the 1st few months of 2024. The terminal rate move down from over 5.03% to 4.93% or so. Hope of perhaps even more dovishness to come from Powell which might move the terminal rate toward the Fed’s target from the central tendencies at the last meeting (near 4.75%). However, when Powell stepped up to the podium, the storyline started to change, and it seemed to get worse and worse as he went along saying:
- Very (and he emphasized the word “very”) premature to think about pausing
- The ultimate top rate is very uncertain but CPI and labor data suggest may it will be higher than previously thought
- We think there is some ground cover, and cover it we will
The market’s perception of the terminal rate reversed back to the upside and stands currently at 5.09% up from the 4.93% (remember that is still above the 4.6% terminal rate from the September central tendencies).
Inflation is not dead. Employment remains strong, and the Fed has the fear that the inflation genie is either already out of the bottle (they won’t say it because of fear that saying it will make it even more entrenched) or close to it. In addition, if there is a perception of lower rates, they are NOT prepared to support that notion.
Sure there is demand destruction in the housing market. But remember, housing price rose unabated in 2020, 2021 and into 2022. There is room to roam to the downside.
Stock prices are lower and could go even lower. During the dot.com bubble the S&P fell close to 50% from its peak. The S&P at the low was down some 27.5%. This is a liquidity/free money bubble that still needs to be broken. See post here.
The fed cannot admit any more than they did in the statement today (they knew it but didn’t explicitly say it), until unemployment rate moves higher, the job openings declines more, the quits rate moves further to the downside, inflation makes a serious run back toward 2%. Buckle up.
In the US equity market, the major indices are closing down between -1.5% to -3.36%.
- Dow industrial average -505.46 points or -1.55% at 32147.75
- S&P index -96.43 points or -2.5% at 3759.68
- NASDAQ index -366.04 points at -3.36% at 10524.81
- Russell 2000-62.25 points or -3.36% at 1789.13
In the US debt market, the shorter term yields moved up with the 2 year trading back toward the high yield from last week at 4.639% (it traded as low as 4.27% on Friday and Monday). The 2 year currently trades at 4.603%. The 10 year yield is up to 4.076% from a corrective low of 3.9% reached last Friday.
In the currency markets, the price action was dollar down, dollar up. The greenback is trading near it’s highs vs all the major currencies with the exception of the USDJPY (the JPY is the strongest of the major currencies). The dollar is lower vs JPY (-0.32%). However, the greenback was much lower than current levels (the low reached 145.65). The current price is at 147.80 after reaching a post FOMC high of 147.96. The Asian session high reached 148.36 and price closed yesterday at 148.21.
The US dollar moved the most vs. the GBP (USD up 0.78% – the GBP was the weakest of the major currencies – see chart below ranking the major currencies. ). The GBPUSD squeezed above its 100 hour moving average at 1.1526, but reversed back below that moving average and its 200 hour moving average at 1.14786 on its way to a low of 1.1387. The price is currently trading just off that low at 1.1390. The 50% midpoint of the move up from the October 21 low cuts across at 1.13519. That is the next target on the downside.
The EURUSD is trading down -0.50% on the day at 0.9823. The high price reached 0.99754 before rotating back down and breaking below the 200 and 100 hour moving averages near 0.9925 on its way to a low for the day at 0.98215. The price currently trades at 0.9824. The 50% midpoint of the move up from the September 28 low comes in at 0.9814. Move below that level and it opens the door for further selling in the new trading day.