By Peter Tchir of Academy Securities

Unthinking The Fed

There has been a lot to process since 2 pm yesterday. First the dots and then the press conference.

I wanted to title this morning’s piece, Re-Thinking the Fed, but unthinking seems more appropriate. Thinking hasn’t necessarily been a good thing in these markets – we’ve been bullish, but resorted to channeling Wayne’s World and Beevis and Butthead – certainly not known as “thinkers”.

Let’s unthink a couple of things.

We saw 4.3% as a target for 10’s and viewed that below 4.2%, lower yields would NOT be supportive for stocks. But that was under the assumption, or view, that the Fed had its foot on the brakes and was willing to risk slowing the economy down too quickly versus letting inflation re-ignite.

The dots gave some indication that the Fed’s “reaction function” had changed. It was 3 cuts instead of 2 in 2024, taking us to 4.625% from 5.125%. Exactly back to where they were in their June projections and well above the 4.25% dots from their March projections. The dots, I thought, could be somewhat ignored, though they signaled a mindset shift.

It was the press conference that was extremely telling:

• Powell did not push back on markets or try and “undo” any of the bullishness the dots and statement elicited – he has in the past, so that was important.

• He was almost dismissive of any question regarding how much markets had eased financial conditions since the last meeting.  This shocked me the most as he had every opportunity to use the dramatic market moves to sound hawkish. Hawkish rhetoric was handed to him on a silver platter, and he dismissed it.

• Finally, while not quite doing donuts in a NASCAR or F-1 style victory celebration, he pretty much took a victory lap. We’ve been pounding the table that inflation fears remain overdone, but even we are struggling to see how the data has changed that much since the last meeting. Feeling more comfortable with the lower inflation calls, but we weren’t calling it a victory yet, but here was the Fed chair, virtually saying it was. That too was a major change.

Academy had the privilege of being on Bloomberg TV this morning, and in addition to some of these thoughts, we did address something that we’ve mentioned a few times since the end of the summer. Basically, we felt the Fed would be far more reluctant to trigger a recession during an election year, than they were in 2023. We are not saying that the Fed is political [ZH: we are]. What we are saying is that they know recessions influence elections (negatively for the incumbents) and we suspected they would want to avoid that. The tone out of D.C. on inflation and rates has changed noticeably over the course of the year, which supports this somewhat awkward (but realistic) view. So maybe, that played into the shift in tone from the Fed yesterday?

Back to Unthinking The Fed

With all that said and done, our “thought process” (yes, I know I said we don’t think, but yeah, there was a thought process) was basically:

• Below 4.2% on 10’s would be difficult UNLESS the data was awful.

• If the data was good, the Fed would at least threaten to tap the brakes.

Neither of those “thoughts” seem valid after yesterday.

My initial reaction was to “fade” the move- I was literally dying to fade the mood, as we already expressed concern about overstaying our welcome at this party.

But, as we digest everything that went on, we are left wondering if this has just been the “pre-party”?

The Russell 2000 has outperformed the Nasdaq 100 by almost 7% since November 9th  (15.6% return versus a 9% return). If futures are any indication (and yes, there are Russell 2000 futures) that outperformance will increase more today.

So, we’ve like the laggards

• Small and regional banks

• Small caps

• Commercial Real Estate

• “Disruptive” Tech (they have performed in line with the Nasdaq, but they should be a much higher beta, so that seems like they have lagged, to me)

• I am finally prepared to add energy to this list

Why shouldn’t they continue to do well? If the Fed put is back, if the Fed is going to err to the side of letting things run, rather than over-fighting inflation, then why shouldn’t we see a big rotation?

Not only are yields lower (helps all potential borrowers), rate cuts are likely coming (helps floating rate borrowers), but spreads have also compressed! (CDX IG, a CDS index of investment grade credit is at 55 bps, is at its lowest since 2021. We were looking for it to trade in the 50’s (we are here), but with the pivot in the Fed, that index should probably get to the 40’s. Maybe high 40’s, but 40’s nonetheless.

This is all good for the economy and stocks.

Bottom Line

I like the “laggards” even more than I did ahead of the Fed.

I am mildly bullish the Nasdaq 100, versus neutral – the returns, will be heavily skewed towards the laggards.

Credit, already tight in terms of spreads, will see lower spreads.

Rates, probably too far too fast, from 5% to 3.95% in less than two months, but the range has shifted again, this time, due to the Fed’s stated reaction function.

I would not be surprised to hear some FedSpeak pushing back on yesterday’s messaging, but the genie is out of the bottle and isn’t going back in any time soon.

We will watch earnings and data, but how we react to that will have shifted as the Fed gives us “hope” that they have given us back our beloved Fed Put!

Finally, we have not seen anything positive out of China, and I still expect to see something, where either we produce an olive branch, or they do their own stimulus, or both, which would provide more momentum for all assets!

By the way, our rising treasury debt problem has not gone away, and that will come back as a discussion point, limiting how much lower bond yields can go. But it won’t hurt stocks that much (should help the Nasdaq 100 vs Russell 2000 trade I like so much).

Authored by Michael Maharrey via SchiffGold.com,

The Federal Reserve just surrendered to inflation.

Fed officials won’t call it a surrender.

They’re claiming victory. But surrender is the effect of the policy trajectory laid out by the Federal Open Market Committee (FOMC) at its December meeting.

As expected, the FOMC held rates steady at the December meeting extending the rate hike pause into its fourth month. But during his press conference, Powell confirmed that the recent rate hike pause was actually the end of tightening, saying it is “not likely” that the central bank will hike rates again.

While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table.”

There was little change to the official FOMC statement. The real news was the “dot plot” showing the expected trajectory of interest rates. The Fed has penciled in three rate cuts for 2024 with another four cuts in 2025. That would lower rates to between 2 and 2.5%.

Keep in mind that last month, Federal Reserve Chairman Jerome Powell claimed rate cuts weren’t even on the table.

“The fact is the committee is not thinking about rate cuts right now at all,” Powell said during his press conference after the November FOMC meeting.

As Peter Schiff said in a post on X, it’s pretty clear Fed officials have been thinking about rate cuts for a long time. Policy pivots like this don’t happen in a vacuum.

During his press conference, Powell emphasized that the central bank doesn’t need a recession to cut rates.

“It could just be a sign that the economy is normalizing and doesn’t need the tight policy,” he said.

For the time being, the Fed plans to continue balance sheet reduction. But Powell said if the economy slips into a recession, quantitative tightening will no longer be appropriate.

Inflation Isn’t Beat

It seems a little early to put price inflation in its grave.

The mainstream hyped the November CPI report as another positive sign that price inflation is easing, but the only number that dropped was the annual rate (from 3.2% to 3.1%.) Every other metric was up month on month, and core CPI remains mired at 4%, double the Fed’s mythical 2% target.

Even Powell admits that price inflation isn’t dead.

Inflation has eased from its highs, and this has come without a significant increase in unemployment. That’s very good news. But inflation is still too high. Ongoing progress in bringing it down is not assured and the path forward is uncertain.”

He also conceded that the FOMC doesn’t see the Personal Expenditure Index (PCE) dropping to 2% until 2026. As Schiff pointed out, the PCE is not the CPI, and it is the official measure that most understates the true inflation rate.

Powell is using the PCE as his benchmark as he likely knows the CPI will never return to 2%.”

While recent CPI data may reflect a slowdown in rising prices and create a sense of optimism, the victory dance is a bit premature.

Monetary Policy Isn’t Tight

The Federal Reserve raised interest rates from zero to 5.5% relatively quickly, and Powell claims that rates are now “well into” restrictive territory.

They aren’t.

The Chicago Fed’s own Financial Conditions Index confirms this. As of the week ending December 8, the index stood at -0.51. A negative number indicates loose financial conditions.

And financial conditions are trending looser, not tighter. The index was at -0.46 the prior week.

Meanwhile, the Fed managed to shrink its balance sheet from $8.965 trillion at the peak of COVID-era quantitative easing to $7.737 trillion today. That seems impressive until you consider that the Fed added $4.8 trillion to the balance sheet during the pandemic alone. At the current rate of balance sheet reduction, it would take about 7 years just to remove all of the liquidity (inflation) added to the economy during COVID. That doesn’t even begin to touch the trillions added to the balance sheet in the wake of the 2008 financial crisis.

All of the money that the Fed created both during the pandemic and the Great Recession is inflation and it is still sloshing around out there in the economy.

Victory Means Defeat

The mainstream financial media is framing this as a victory. The Fed won the inflation fight and that’s why it doesn’t have to hike rates anymore. In his podcast, Schiff had a different take.

This was not the Fed winning its inflation fight. That’s not what happened. The Fed surrendered. Inflation won the fight.”

Schiff went on to say this wasn’t a pivot in victory. It was a pivot in defeat.

The Fed stopped hiking rates because it can’t hike them anymore. It’s worried about the consequences of these hikes — particularly how it’s going to impact the federal budget and all of the debt that is maturing and needs to be rolled over in 2024.”

It’s important to understand that by declaring victory and pivoting to rate cuts, the Fed is returning to the very policies that caused price inflation to begin with. Schiff said, “If people thought inflation was bad before the Fed declared victory, wait until they see how much worse it’s going to get now that they’ve declared it.”

Now that the Fed has said, ‘Mission accomplished!’ the dollar is going to tank. Commodity prices should soar. And that is going to reinvigorate inflation. It’s not dead. It’s alive and well. As much as the financial world wants to bury it, it’s going to resurrect. It’s going to rise like a Phoenix from a pile of fake ashes.”

Powell’s overall message was that the Fed managed to take out price inflation without any significant damage to the economy. In effect, Powell is saying “We stuck the landing!” But Schiff said the only reason the Fed hasn’t killed the economy and the labor market is because it hasn’t killed inflation.

Inflation is alive and well. That’s the reason. If the Fed really did what it took, if it was going to continue to hike rates like it should, if it was going to force the government to cut spending, which is the purpose of a lot of these rate hikes, then we would have seen the damage to the economy. We would have seen the damage in the labor market. It’s only because the Fed surrendered and that inflation has won that we didn’t see that type of damage.”

Schiff provided a detailed breakdown of the Fed meeting and Powell’s comments on his podcast.

The Northern Hemisphere winter has been mostly mild so far, driven by a weather phenomenon known as “El Niño.” As a result, natural gas futures in the US have plunged to six-month lows on ample supply while the spread between March and April contracts, known as the “Widowmaker” because of its high risk and volatility, has dropped below zero. 

Bloomberg pointed out, “It’s the earliest in the season that the spread — which typically doesn’t drop below zero until the end of January or later — has gone negative on a closing basis since 2020.” 

The rationale behind this trade is based on weather patterns and supply-demand dynamics. Across the Lower 48, March is still a winter month with higher demand for heating, which tends to keep natural gas prices elevated. By April, spring begins to arrive, and heating demand is reduced. Traders betting on this spread aim to profit from these predictable seasonal patterns. 

But as the bet is known as Widowmaker, it’s notoriously risky because weather is unpredictable and can quickly change. This bet has led to the implosion of hedge funds such as Amaranth Advisors LLC in 2006. 

Since the start of November, natural gas futures have plunged 35% because the mild winter has dented gas demand. 

Weather forecasting data for the Lower 48 shows temperatures for December are above 30-year, 10-year, and 5-year averages. 

Data from the Climate Prediction Center also validates mild weather forecasts for the remainder of this month. 

Some weather forecasters believe a “pattern change is still on course for January” for North America. 

The influence of the El Nino continues to grow, helping to create a strong Jet Stream pattern over the Pacific Ocean, bringing warmth into North America. But a pattern change is still on course for January.https://t.co/iD0a8DTm2e

— severe-weather.EU (@severeweatherEU) December 14, 2023

And that is why this trade is known as the Widowmaker. 

Authored by Jana Pruet via The Epoch Times,

A lawyer for Michael Cohen appears to have cited non-existent court rulings in a legal filing seeking to have his client’s post-prison supervision terminated early, according to a federal judge in New York who is threatening penalties.

On Tuesday, U.S. District Judge Jesse Furman ordered David M. Schwartz to provide copies of three rulings cited in the motion he filed last month. Mr. Schwartz must respond with copies to the judge by Dec. 19. If he cannot, he must explain in writing why he should not sanctioned.

“As far as the Court can tell, none of these cases exist,” Furman wrote.

He added that if copies of the rulings aren’t submitted, he wanted “a thorough explanation of how the motion came to cite cases that do not exist and what role, if any, Mr. Cohen played in drafting or reviewing the motion before it was filed.”

Mr. Cohen, who served as a personal attorney for former President Donald Trump, gained notoriety as the “fixer” but later fell out of grace to become one of the former president’s loudest critics.

Mr. Schwartz did not immediately respond to phone and email messages Wednesday.

E. Danya Perry, a new attorney representing Mr. Cohen, said she could not verify the case law cited in Mr. Schwartz’s motion.

In late 2018, Mr. Cohen was sentenced to prison after pleading guilty to tax evasion, campaign finance charges, and lying to Congress. He served about 13 1/2 months in prison, along with 18 months in home confinement, before being placed on three years of supervised release.

Mr. Cohen, 57, has been on supervised release since November 2021.

During discussions of possible sanctions, Judge Furman referred to a separate, unrelated case in a Manhattan federal court earlier this year involving the citing of case law that did not exist.  Two lawyers in that case were fined $5,000 for citing bogus cases invented by ChatGPT, the artificial intelligence-powered chatbot.

There is no mention of the use of artificial intelligence in the motion issued by Judge Schwartz.

Mr. Cohen has served approximately two years of his supervised release from prison. His campaign finance conviction came after he arranged payouts to prevent porn star Stormy Daniels and model Karen McDougal from making public claims of extramarital affairs with former President Trump during his 2016 campaign.

On Nov. 29, Mr. Schwartz filed a motion requesting Mr. Cohen’s supervised release ended early, citing his client’s testimony in New York Attorney General Letitia James’ ongoing civil lawsuit alleging President Trump and his business inflated his wealth in financial documents.

Ms. Perry said she conducted her own research to support the judge’s motion, and she could not verify the case law cited by Mr. Schwartz.

“Consistent with my ethical obligation of candor to the Court, I advised Judge Furman of this issue,” Ms. Perry said in a statement, adding that she believed the motion still had merit.

In his motion to end Mr. Cohen’s supervised release, Mr. Schwartz cited three cases that he claimed were all affirmed by the 2nd U.S. Circuit Court of Appeals in New York.

But Judge Furman said one of those citations actually referred to a 4th U.S. Circuit Court of Appeals ruling that was unrelated to supervised release. A second case mentioned by Mr. Schwartz is a Board of Veterans Appeals decision, the judge said. And the third citation “appears to correspond to nothing at all,” Judge Furman wrote.

Earlier this year, Mr. Cohen told Semafor he was considering running for Congress as a Democrat in New York’s 12th Congressional District, the Manhattan seat currently held by Rep. Jerry Nadler.

One day after the Fed’s bizarre, unexpected pivot, many are struggling to wrap their heads around what happened: what exactly changed in less than two weeks for Powell to go from telling the market it was “premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease” to suddenly warning that rate cuts are something “that begins to come into view, and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.”

Even Powell’s own mouthpiece, WSJ reporter Nick “Nikileaks” Timiraos, was confused remarking sarcastically after the FOMC “what a difference two weeks can make.“

Ok, so let’s take a closer look at the two weeks between Dec 1 and Dec 13 when supposedly everything changed.

What we find is that the main economic events that took place were the ISM Services on Dec 5, the November Payrolls report on Dec 8, the University of Michigan Consumer Sentiment report, the CPI report on Dec 12 (and let’s add today’s retail sales data just for additional context).

Turning to each of these in order, we start with the ISM Services report which was a clear beat and rebound from the previous month…

… the jobs report was an impressive beat and also a significant improvement from the previous report…

… not to mention the unemployment rate which came in far below expected and was a big drop from the previous one (the Sahm’s Rule watchers, who were worried it would telegraph an imminent recession, could relax)…

… average hourly earnings also came in hotter than expected (i.e., inflationary)…

… which in turn helped the UMichigan Consumer Sentiment report, which exploded higher from 61.3 to 69.4 (smashing estimates of 62.0)…

… as for the inflation print, well November CPI came in hotter than expected (so contrary to whatever disinflationary trend the Fed may be falling back on to justify its dovishness).

Last but not least was today’s retail sales which came in scorching hot – the 5th consecutive beat in a row – and confirmed that contrary to what the Fed is telegraphing, the US consumer is not only not slowing but supposedly spending much more than Wall Street expected. Maybe Powell did not have that data, but he certainly had access to the same real-time card spending data that Bank of America has, and which allowed to correctly predict just how big of a beat today’s retail sales data would be.

Yet, after all this stronger than expected and/or improving data, or hotter inflation, Powell made an unexpected 180 pivot on what he said two weeks earlier when the data was generally worse – and less inflationary – than it is today. And as the FOMC ‘pivoted’ in a dovish direction, its impact on markets was profound. Looking at the market this morning, the US 10y yield has plunged nearly 20bps since the decision, the 2y yield a little over 30bps. Markets are now pricing for six cuts of 25bp in 2024, with the first one fully priced in for March.

Yet, clearly, the key driver of the sharp reaction by markets was the fact that Powell decided not to push back against market expectations of early (and significant) cuts for 2024.

And the punchline: although the FOMC hasn’t taken the possibility of further hikes off the table, Powell admitted that the FOMC has started to talk about when to dial back rates, a huge reversal from what he said less than two weeks prior when he claimed that it was “premature” to speculate on rate cuts. He said that the Committee had not worked out the cutting cycle yet, but he did say they would not wait with cutting until inflation was at 2%, because they don’t want to overshoot.

Of course, as we have shown above, none of this overshooting danger was in the recent data; if anything, the data has come in stronger since the start of the month as did inflation, so assuming the same Powell from his Dec 1 appearance at the Spelman College fireside chat was still around, what he should have said is doubling down on that very same message…. instead he did just the opposite.

This, according to Rabobank, basically erodes the importance of any near-term inflation data that would still point to inflation above its target, whilst it elevates those data that support the view that inflation is on its way down. The Wall Street Journal’s Nick Timiraos tweeted that Powell said that some members even changed their minds halfway through the meeting, when (lower-than-expected) PPI numbers came out.

Powell: Some Fed officials changed their forecasts after the PPI numbers were released on Wednesday

— Nick Timiraos (@NickTimiraos) December 13, 2023

But as even first-year financial analysts know, what PPI measures more than anything, is commodity input costs, i.e., oil, gasoline, food, and so on… all items the Fed religiously avoids in its preferred inflation measure, the core PCE.

So the picture that emerges is a puzzling one: on one hand with weaker data in hand, the Fed Chair said it was “premature” to talk about rate cuts, yet less than two weeks later, with stronger data in place and with hotter than expected inflation, Powell suddenly flip-flopped 180 degrees, shocking even veteran traders, when supposedly the Fed now was looking at precisely those things (PPI) which it went to great lengths to avoid when inflation was soaring.

Or maybe there is no puzzle at all: maybe what that happened in the past two weeks had nothing to do with economic data, the state of the US consumer, or how hot inflation is running and everything to do with… phone calls from the increasingly angry White House, the same White House which after seeing the latest polling data putting Biden at the biggest disadvantage behind Trump despite the miracle of “Bidenomics”…

… decided to pull its last political level, and had a back room conversation with the Fed Chair, making it very clear that it is in everyone’s best interest if the Fed ends its tightening campaign and informs the market that rate cuts are coming. It certainly would explain why despite keeping the 2026 projected fed funds rate unchanged at 2.875%, the Fed just as unexpectedly decided to pull one full rate cut out of the non-election year 2025 and push it into the pre-election 2024.

Nonsense, the Fed is apolitical, it would never yield to political pressure, you say!?

Well, that dear reader, is bullshit, as even the NYT reminds us in this particular vivid anecdote from 1965 recounting the dramatic interaction between former US president Lyndon B Johnson and then-Fed president William McChesney Martin, when the head of the US central bank – much to LBJ’s displeasure – hiked rates by half a percentage point, infuriating the Democratic president, to wit:

At the Board of Governors meeting that afternoon, he called for a vote to raise the discount rate a half-percentage point, to 4.5 percent. But before the vote, he conceded that raising the rate would essentially wave a red flag before the critics of an independent Federal Reserve, in Congress and in the White House. “We should be under no illusions,” he told his colleagues. “A decision to move now can lead to an important revamping of the Federal Reserve System, including its structure and operating methods. This is a real possibility and I have been turning it over in my mind for months.”

The vote was 4 to 3. Martin cast the deciding ballot.

In Texas, Johnson was enraged. Joseph Califano, an aide (later a cabinet secretary under President Jimmy Carter), recalled Johnson’s “burning up the wires to Washington, asking one member of Congress after another, ‘How can I run the country and the government if I have to read on a news-service ticker that Bill Martin is going to run his own economy?’”

Martin was summoned to explain why he had defied the president.

Martin flew down to the Johnson Ranch on Monday, Dec. 6, along with Fowler and other advisers. The president met them at an airstrip behind the wheel of his Lincoln convertible. They piled in and he drove them to the house.

There, Johnson got Martin alone and did not mince words. According to different accounts, the 6-foot-4 Johnson pushed the shorter Martin up against a wall.

“You went ahead and did something that you knew I disapproved of, that can affect my entire term here,” Johnson said, as Martin recalled later in an oral history. “You took advantage of me and I’m not going to forget it, because here I am, a sick man. You’ve got me into a position where you can run a rapier into me and you’ve run it.”

“Martin, my boys are dying in Vietnam, and you won’t print the money I need,” he said.

Martin stood his ground. He pointed out that he had given the president fair warning that a raise was coming. More broadly, he insisted that he and the president had different jobs to do, that the Federal Reserve Act gave the Fed responsibility over interest rates.

“I knew you disapproved of it, but I had to call the shot as I saw it,” he said.

The two eventually stepped outside and tried to assure reporters that any differences had been patched up. Their sour expressions, captured in newspapers the next day, suggested otherwise.

Ironically, in the end LBJ got what he wanted as the next episode from the NYT reveals:

… in 1965, President Lyndon B. Johnson, who wanted cheap credit to finance the Vietnam War and his Great Society, summoned Fed chairman William McChesney Martin to his Texas ranch. There, after asking other officials to leave the room, Johnson reportedly shoved Martin against the wall as he demanding that the Fed once again hold down interest rates. Martin caved, the Fed printed money, and inflation kept climbing until the early 1980s.

Almost 60 years later, Powell decided not to “call the shot as he saw it” just two weeks ago, and instead of being shoved against the wall by Biden’s thugs, to instead capitulate what little credibility the Fed had just so Biden’s odds of getting reelected in 2024 were ever so fractionally higher…

November marked the first annual decline in Manhattan rental prices in over two years, indicating the apartment market faces sliding demand and increased supply amid a typical seasonal slowdown. 

New data from brokerage Douglas Elliman Real Estate showed the median rent in Manhattan fell 2.3% in November, from $4,095 one year ago to $4,000. It was the first year-over-year decline in median price in 27 months. 

“Prices hit an affordability threshold and this is the reaction,” Jonathan Miller, CEO of Miller Samuel, told CNBC. 

The wall of affordability was hit in July and August when rents topped a record high of $4,400. Since then, median prices have slid 9.1%. Even though this is great news for apartment hunters, prices are still dramatically higher when compared with pre-Covid levels. 

“The decline has been sudden,” said Keyan Sanai, the top rental broker for Douglas Elliman in New York.

Manhattan’s vacancy rate increased for the 14th consecutive month, reaching a level of 2.93% – indicating landlords listed more apartments. Miller explained the boost in supply comes from landlords pivoting from the Airbnb market due to new city restrictions. 

Sanai said landlords are offering better concessions, such as free rent for a month, instead of reducing the list price. He said a recent one-bedroom listing in midtown with an asking price of $4,700 was able to be negotiated down to $3,900 after concessions were factored in. 

According to the brokerage, the number of apartments offering concessions increased from 12% in October to 14% in November. 

This slowdown in Manhattan rents comes as the latest consumer price data shows shelter/rent inflation nationwide is beginning to accelerate to the downside:

• Shelter inflation: 6.51%, down from 6.72% and lowest since August 2022

• Rent inflation: 6.87% down from 7.18%, first sub 7% print since August 2022

As we’ve pointed out for months, high-frequency rent inflation has been tumbling for much of this year, suggesting even more downside into 2024. 

The housing market could heat up in spring as the Federal Reserve’s rate hiking cycle appears to have ended. Rate traders have priced in 150bps in cuts for next year. 

Sanai explained: “For landlords, I think it could be a dark winter, then things will probably get brighter in the Spring.” 

Having surprised to the downside (-0.1% MoM) in October, analysts expected another small decline (-0.1% MoM) for November as the resumption of student loan payments (in October) begins to weigh on the ‘resilient’ consumer.

BofA’s omniscient analysts were more optimistic with upside surprises expected, especially ‘core’…

Once again, BofA was right as headline Retail Sales rose 0.3% MoM in November (but this was helped by a downward revision to -0.2% MoM in October), pushing retail sales up 4.1% YoY (nominal)…

Source: Bloomberg

Core Retail Sales were a major beat – just as BofA warned – Ex-Autos +0.2% MoM (-0.1% MoM exp) and Ex-Autos and Gas +0.6% MoM (+0.2% MoM exp). This pushed the core retail sales up 4.9% YoY…

Source: Bloomberg

The Control Group – which filters into GDP – also beat.

Under the hood, Gasoline Stations were the biggest drag (lower prices) while Food Services and Nonstore Retailers dominated the upside MoM…

All seems a little too ‘hot’ for Goldilocks?

As completely expected, The ECB held policy steady, reiterating its guidance on future moves unchanged:

“Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.”

Also as expected, the ECB accelerated its balance-sheet reduction by allowing some bonds maturing from its pandemic portfolio to roll off before the end of next year, which is bearish for bonds. Here’s what the ECB says exactly:

“Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.”

It had previously envisaged reinvesting the principal payments from maturing securities “until at least the end of 2024”.

But The ECB slashes its inflation outlook:

• ECB Sees 2023 Inflation at 5.4%; Prior Forecast 5.6%

• ECB Sees 2024 Inflation at 2.7%; Prior Forecast 3.2%

But, The ECB warned that while inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.

Additionally, The ECB lowered its economic growth forecasts:

• Sees 2023 GDP at 0.6%; Prior Forecast 0.7%

• Sees 2024 GDP at 0.8%; Prior Forecast 1.0%

• Sees 2025 GDP at 1.5%; Prior Forecast 1.5%

• Sees 2026 GDP at 1.5%

However, it appears, relative to The Fed, this is ‘hawkish’ and the Euro is holding overnight gains…

There are no real changes in money market pricing over 2024 ECB rate cuts. A total of 154 basis points are priced in, compared with 156 basis points before the statement. Chance of a March cut is steady at around 80%.

Will Christina Lagarde jawbone a dovish bias?

*  *  *

Read the full redline below:

Update: 

For further proof that the Biden administration is weaponizing government agencies to target Elon Musk,  Commissioner Brendan Carr stated in an X post, “President Biden gave federal agencies the green light to go after him [Musk].”

Last year, after Elon Musk acquired Twitter, President Biden gave federal agencies the green light to go after him.

And they have.

Today, the FCC adds itself to the growing list of federal agencies engaging in the regulatory harassment of Elon Musk.

I dissent. pic.twitter.com/1zEoGCwiNk

— Brendan Carr (@BrendanCarrFCC) December 12, 2023

Musk recently described the apparent ‘beef’ that the Biden administration has with him. In September, he told All-In Podcast host entrepreneur David Sacks:

“…there does seem to be some significant increase in the weaponization of government and really sort of misuse of prosecutorial discretion in many areas… I think this is really a dangerous thing for there to be partisan politics with government agencies.”

Musk continued:

 “I don’t think the whole administration has it out for me.

 “But I think there’s probably aspects of the administration… or aspects of interests aligned with President Biden who probably do not wish good things for me.”

The weaponization of government agencies against Musk suggests leftist radicals in the White House are terrified of the billionaire’s power and must stop him at any cost – even if that means jeopardizing the nation’s space race.

*   *   * 

Elon Musk has voiced concerns that radicals within the Biden administration might attempt to ‘weaponize’ federal agencies against his businesses, citing his move to make X a ‘free speech’ social media platform. This concern was underscored in a decision by the US Federal Communications Commission on Tuesday to withhold approximately $900 million in rural broadband subsidies from SpaceX’s satellite internet unit, Starlink. 

The FCC “reaffirmed” its initial decision from last year to deny SpaceX the $886 million in federal funding because it could not demonstrate program requirements, such as high-speed internet, for users in 35 states: 

“After careful review, we find that the [Wireline Competition] Bureau followed Commission guidance and correctly concluded that Starlink is not reasonably capable of offering the required high-speed, low latency service throughout the areas where it won auction support,” the FCC said in a 3-2 ruling.

For SpaceX to receive funding from the FCC’s Rural Digital Opportunity Fund (RDOF), it must deliver average download speeds of over 100Mbps and upload speeds of 20Mbps to rural America by December 2025. One year ago, the FCC denied funding over Starlink’s strained satellite capacity.

“The FCC followed a careful legal, technical and policy review to determine that this applicant had failed to meet its burden,” FCC Chair Jessica Rosenworcel said.

In response to the decision, the tech blog PCMag quoted SpaceX as saying: 

“This decision directly undermines the very goal of RDOF: to connect unserved and underserved Americans. Starlink is demonstrably one of the best options—likely the best option—to accomplish the goals of RDOF. Indeed, Starlink is arguably the only viable option to immediately connect many of the Americans who live and work in the rural and remote areas of the country where high-speed, low-latency internet has been unreliable, unaffordable, or completely unavailable, the very people RDOF was supposed to connect.”

Two Republican commissioners on the five-member FCC panel disagreed with the decision. They suggested the denial was due to the Biden administration’s bitterness toward Musk. 

FCC Commissioner Brendan Carr warned about Biden officials weaponizing agencies against the billionaire: 

“Today, the Federal Communications Commission adds itself to the growing list of administrative agencies that are taking action against Elon Musk’s businesses. I am not the first to notice a pattern here. Two months ago, The Wall Street Journal editorial board wrote that “the volume of government investigations into his businesses makes us wonder if the Biden Administration is targeting him for regulatory harassment.” 3 After all, the editorial board added, Elon Musk has become “Progressive Enemy No. 1.” Today’s decision certainly fits the Biden Administration’s pattern of regulatory harassment. Indeed, the Commission’s decision today to revoke a 2020 award of $885 million to Elon Musk’s Starlink—an award that Starlink secured after agreeing to provide high-speed Internet service to over 640,000 rural homes and businesses across 35 states—is a decision that cannot be explained by any objective application of law, facts, or policy.” 

Musk chimed in on X, stating the decision “doesn’t make sense.” 

“Starlink is the only company actually solving rural broadband at scale! They should arguably dissolve the program and return funds to taxpayers, but definitely not send it those who aren’t getting the job done. What actually happened is that the companies that lobbied for this massive earmark (not us) thought they would win, but instead were outperformed by Starlink, so now they’re changing the rules to prevent SpaceX from competing.”

Despite all of this, the Department of Defense recently called its nine-month pilot test of Starlink terminals in the harsh, snowy environment in the Arctic a ‘success.’ 

Meanwhile, SpaceX has accelerated its rocket launches to put more Starlink satellites into orbit every month. There are about nearly 5,000 of these satellites in orbit.

For comparison, Jeff Bezos’ space internet company only has a few satellites in orbit. Furthermore, Bezos had to tap Musk for rocket launches because his rocket company had been hit with severe delays. 

Starlink had over two million users in September, operating across seven continents in over 60 countries. 

“SpaceX continues to put more satellites into orbit every month, which should translate to even faster and more reliable service,” said Republican FCC Commissioner Nathan Simington. 

Meanwhile, SpaceX has launched over 80% of the world’s payload to orbit this year. That figure will likely increase in 2024. 

Musk is the leader in the space race with the most launches this year, beating entire countries like China. He also leads the space internet race. 

However, with all this success, the Biden administration is terrified of the world’s richest man and has likely chosen to weaponize federal agencies against his companies. The leader of the free world should not be weaponizing the government after his opponents that jeopardize the space race for the country. 

Virtually every risk asset across the globe is rallying this morning, as the dollar and interest rates get whacked after the Fed unexpectedly signaled a much more dovish outlook including more than expected interest-rate cuts next year, unleashing bullish euphoria across markets amid optimism that inflation pressures are easing. After the Dow already tipped into record territory yesterday, on Thursday it was tech’s turn – Nasdaq 100 futures climbed, setting up the index for a run at a record close; meanwhile S&P 500 contracts edged 0.3% higher after the benchmark ended within 2% of its record high on Wednesday. Europe’s Stoxx 600 index surged as much as 1.7%. Shares in Germany and France hit fresh all-time peaks. Bond yields are lower with the bulk of the curve seeing a bull steepening and the 10Y now well below 4% (3.94% last). The USD sell-off continues which in turn is helping to boost commodities where Energy is leading and $70 is now acting as support for WTI. The macro data focus is on Retail Sales and Jobless Claims: given the upside surprise delivered by the Fed, this data may not be market-moving but remain useful for understanding whether the growth without inflation hypothesis remains intact.

In premarket trading, Adobe shares are down 6.1% after the software company gave a full-year forecast that is weaker than expected on key metrics. Separately, it also disclosed that the US FTC has been investigating the company’s subscription cancellation practices for more than a year. Here are some other notable premarket movers:

• AerSale shares fall 11% after the company announced a secondary offering of 4 million shares.
• AngloGold Ashanti shares rise 6.0% in New York as South African precious-metals shares rally. Gold gained after the Federal Reserve gave the clearest signal yet that its aggressive interest-rate tightening campaign has ended. Pro
• Pagaya Technologies shares rise 6.5% as Jefferies initiates coverage on the fintech company’s stock with a recommendation of buy. The broker notes that the firm’s business model creates “a powerful network effect.

According to JPM strategists, the market narrative has shifted forcefully to soft landing which may be supported by upcoming Fedspeak and reflected in the yield curve, with JPM saying that we now “wait and see if the SPX can breach 4,800 before year-end.” The risk-on rush follows a pivot to looser policy by the Fed, which held rates steady Wednesday and forecast that their next moves would be lower. Policymakers’ projections in the “dot plot” showed 75 basis points of reductions in 2024, but traders are even more optimistic, betting on cuts of twice that magnitude.

“There’s been a lot of debate in recent weeks about whether investors are getting ahead of themselves, too optimistic about how quickly the Fed will cut rates — but the message from the central bank is that is not the case,” said Craig Erlam, senior market analyst at Oanda.

Indeed, some strategists are wary that much of the latest upswing in equities has been powered by the more speculative corners of the market — ranging from unprofitable tech stocks, to regional US banks and battered Swedish real estate. There are warnings that the exuberance might have gone too far. “We’ve seen something of an everything rally and for some parts of the market, the fundamentals don’t really support that,” said Kiran Ganesh, a multi-asset strategist at UBS Global Wealth Management.

Valuations and technicals also suggest stocks are vulnerable to a pullback in the short-term. The S&P 500 and Nasdaq 100 indexes have seen their relative strength indicator — a 0-100 gauge of bullish and bearish price momentum — soar into overbought territory, typically seen as a signal that a decline is imminent. And equties could remain at risk in the event of a downturn, said Joost van Leenders, senior investment strategist at Van Lanschot Kempen. “Whether rate cuts are positive for equities depends on the economy,” he said. “In a soft landing a pivot would be positive. But when the economy slips into recession, rate cuts traditionally don’t prevent a selloff in equities.”

* *  *

In contrast with the Fed, the Bank of England said Thursday that “there is still some way to go” in the fight to control inflation, keeping interest rates at the highest level in 15 years. The pound strengthened and UK government bonds pared their gains after the decision. A rates decision from the European Central Bank is up next on a busy day for policymakers in the region.

Data readings on US retail sales and initial jobless claims due later Thursday will provide an early test of the buoyant mood among investors. Traders would be concerned by any surprises in the data that cloud the view that the surge in inflation has been contained without a significant cost to employment.  

In Europe, the Stoxx 600 erupted another 1.6%, pushing stocks to fresh 2023 highs. European real estate stocks soared while Swedish property shares also got a boost from inflation data in the country. The Stoxx 600 Real Estate Index rose as much as 6.5%, to the highest intraday since Feb., leading gains on the broader benchmark. Swedish property stocks including Fabege, Balder and Sagax were some of the top performers, getting a further boost after data showed that Sweden’s core inflation rate declined more than expected in November, increasing the possibility of interest-rate cuts. UK homebuilders — which are not part of the real estate index — also gained, with Persimmon and Taylor Wimpey both up at least 4%. Here are the top European movers:

• Universal Music Group gains as much as 2.5%, rising to the highest in two years, after it was raised to buy at Citi, which said the entertainment company’s growth potential is “undervalued.”
• Vivendi shares gain as much as 12% after the media conglomerate said it’s exploring splitting up into “several entities,” each of which would be listed publicly.
• RWE, Enel and SSE rise as JPMorgan names them as top picks, while renewables outperform broadly on the prospect of interest rate cuts next year. Beaten-down renewable energy stocks should re-rate in 2024, JPMorgan predicts.
• European real estate stocks jumped after the Fed signaled a series of interest rate cuts next year, while Swedish property shares also got a boost from inflation data in the country.
• Entain rises as much as 8.1% after Corvex bought a stake representing about 4.4% of the gambling company’s outstanding shares, according to a statement.
• AMS-Osram soars as much as 13%, one of the best performers on the Stoxx Europe 600, after it was upgraded to buy at Jefferies, following the recent rights issue and debt raise. The broker cites a healthy balance sheet and an industry upcycle ahead.
• Brunello Cucinelli gains as much as 7.7% after the Italian luxury goods company highlighted strong sales over recent months and “excellent” order intake for its SS24 collections. There could be scope for margin upside, analysts at Deutsche Bank said.
• Gold mining stocks including Fresnillo and Centamin follow the price of gold higher after the US Federal Reserve signaled its tightening campaign has ended.
• Corbion shares rise as much as 6.5% after Inclusive Capital Partners Founder Jeffrey Ubben urged the company to seek strategic alternatives given the “malaise, concern, and apathy” among its public shareholders, according to statement.
• Italian banks such as BPER Banca, Unicredit and Banco BPM and Spanish lenders including Sabadell and Caixabank decline after the Federal Reserve held interest rates steady and forecast a series of cuts next year.
• LPP shares drop as much as 5.4%, the most since September, after Poland’s biggest fashion retailer cut its FY2023/24 sales target. Erste called the outlook conservative, which could dampen sentiment to the stock.
• MorphoSys shares slide 4.6%, paring an earlier 9.6% drop%, after the German biotech firm sold €102.7 million of stock to support its pipeline development, strengthen its finances and for general corporate purposes.

Earlier in the session, Asian stocks rose to a three-month high after the Federal Reserve greenlighted interest-rate cuts for next year, reigniting a bullish pulse across markets as inflation eases. The MSCI Asia Pacific Index rose 1.6%, with AIA Group, Samsung and TSMC among the biggest boosts. Key gauges rose more than 1% in Hong Kong, South Korea and Australia. Japanese equities fell as the yen strengthened, with investors eying an eventual end to the nation’s negative rates.

• Hang Seng and Shanghai Comp were initially positive with the former underpinned after the HKMA kept rates unchanged in lockstep with the Fed, while gains in the mainland were limited following the latest Chinese loans and aggregate financing data which missed estimates.
• Australia’s ASX 200 was lifted with gains led by the rate-sensitive sectors after a fall in yields and with participants also digesting the latest jobs data which showed a much larger-than-expected increase in headline employment change.
• Japan’s Nikkei 225 bucked the trend and was initially boosted at the open but then failed to sustain the 33,000 level and wiped out all its gains amid selling in the banking sector and headwinds from a stronger currency.
• Stocks in India rallied to a new peak on Thursday, tracking gains across global markets after the Federal Reserve signaled the possibility of rate cuts next year. The S&P BSE Sensex Index rose 1.2% to 70,433 as of 10:16 a.m. Mumbai time, while the NSE Nifty 50 Index advanced 1%. The gauges still trailed MSCI’s gauge of Asian stocks which rose as much as 1.7%, its biggest gain in a month.

In FX, the dollar dropped to a four-month low, continuing its losses from Wednesday. The yen climbed by more than 1%, with the Bank of Japan tipped to be a policy outlier by scrapping the world’s last negative interest rate. The Norwegian krone sits atop the G-10 intraday rankings, rising 2% versus the greenback after the Norges Bank surprised most economists with a 25bp hike. The Swiss franc is up 0.1% after the Swiss National Bank stood pat on rates and dropped a reference to selling foreign currency.

In rates, treasuries extended the sharp rally that followed the Fed meeting, with the 10-year yield falling below 4% for the first time since August, and trading at 3.94% at last check. Yields on the policy-sensitive two-year note fell 11 basis dropping as low as 4.28% into the rally; US 2s10s, 5s30s spreads are steeper by 4bp and 5bp on the day. Traders are pricing in 161bps and 125bps of rate cuts by the end of 2024 for the ECB and BOE respectively, ahead of policy announcements at 7am (BOE) and 8:15am (ECB) New York time. Dollar IG issuance slate empty so far; most syndicate desks are of the view that primary market sales are finished for 2023; no deals were priced Wednesday ahead of the Fed.

In commodities, oil advanced from a five-month Thursday low on positive demand signals including a drop in US inventories and the potential for rate cuts by the Fed. Spot gold adds 0.3%, trading just shy of $2,040 as the global liquidity spigots are about to go full blast again.

Looking to the day ahead now, US economic data includes November retail sales, import/export price index and initial jobless claims (8:30am) and October business inventories (10am). Fed members speaker scheduled empty until Dec. 19 with Bostic speaking on the economy and business outlook at the Harvard Business School Club of Atlanta Alumni Leadership Lunch.

Market Snapshot

• S&P 500 futures up 0.2% to 4,716.50
• MXAP up 1.6% to 163.98
• MXAPJ up 1.8% to 509.57
• Nikkei down 0.7% to 32,686.25
• Topix down 1.4% to 2,321.35
• Hang Seng Index up 1.1% to 16,402.19
• Shanghai Composite down 0.3% to 2,958.99
• Sensex up 1.3% to 70,474.76
• Australia S&P/ASX 200 up 1.7% to 7,377.86
• Kospi up 1.3% to 2,544.18
• STOXX Europe 600 up 1.3% to 478.74
• German 10Y yield little changed at 2.03%
• Euro up 0.3% to $1.0907
• Brent Futures up 1.5% to $75.36/bbl
• Gold spot up 0.5% to $2,036.91
• U.S. Dollar Index down 0.31% to 102.55

Top Overnight News

• Japan’s political scandal looks set to wipe out heavyweights of the ruling party’s once-mighty faction favoring big monetary stimulus, easing the path for the BOJ in pulling the economy out of decades of ultra-low interest rates. Prime Minister Fumio Kishida on Wednesday announced he would make changes to his cabinet as he seeks to stem the fallout from a fundraising scandal that has further dented public support for his embattled administration. RTRS
• There are many good reasons for domestic and international investors to keep shunning Chinese stocks. Yet it is also relatively easy to be underweight a market that is underperforming. Any revival would force investors to revisit their assumptions. For those with a stomach for a high-risk, high-return trade, there is scope for a long march upwards. RTRS
• The US, the UK and France are exploring ways to convince Hizbollah to pull back from the Lebanon-Israel border in a diplomatic push to prevent a full-blown conflict erupting between the militant group and Israel. FT
• Norway’s Norges Bank surprises markets with a 25bp hike (from 4.25% to 4.5%) and says rates will be kept at this level “for some time”. RTRS
• ECB: Given our revised inflation profile, we expect the first rate cut in April and now look for faster cuts of 25bp per meeting (vs 25bp per quarter before) until the deposit rate reaches 2.25% by early 2025. While it is possible that the Council cuts rates with the new projections in March, we view April as somewhat more likely given our expectation for firmer growth, the ongoing strength in wage growth and more data to confirm the slowdown in underlying inflation. GIR
• BOE: We remain comfortable with the view that the BoE will cut policy rates later than the ECB and expect the first 25bp cut with the MPR in August. But we now see a faster pace of cuts once policy normalisation starts, with 25bp moves per meeting (vs per quarter before) until Bank Rate falls back to 3% in mid-2025. This quicker pace is more in line with historical cutting cycles, our updated forecast for the ECB and our forecast for a quicker decline in inflation. GIR
• Donald Trump pulled ahead of Joe Biden in Michigan in a Bloomberg News/Morning Consult poll conducted Nov. 27-Dec. 5, after ties in October and early November. He now leads in the monthly tracking poll of all seven swing states that will decide the presidential election. BBG
•  Oil demand set to soften according to the IEA’s Dec report – “Global 4Q23 demand growth has been revised down by almost 400 kb/d, with Europe making up more than half the decline. The slowdown is set to continue in 2024, with global gains halving to 1.1 mb/d, as GDP growth stays below trend in major economies. Efficiency improvements and a booming electric vehicle fleet also drag on demand” IEA  
•  Washington is nearing a breakthrough agreement on immigration reform that would clear the way for an additional package of aid for Ukraine. WSJ

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly higher with sentiment underpinned in reaction to the FOMC. ASX 200 was lifted with gains led by the rate-sensitive sectors after a fall in yields and with participants also digesting the latest jobs data which showed a much larger-than-expected increase in headline employment change. Nikkei 225 bucked the trend and was initially boosted at the open but then failed to sustain the 33,000 level and wiped out all its gains amid selling in the banking sector and headwinds from a stronger currency. Hang Seng and Shanghai Comp were initially positive with the former underpinned after the HKMA kept rates unchanged in lockstep with the Fed, while gains in the mainland were limited following the latest Chinese loans and aggregate financing data which missed estimates.

Top Asian News

• HKMA kept its base rate unchanged at 5.75%, as expected.
• Japan’s negative rate exit scenario is said to be muddled by the Fed outlook with the BoJ preparing to tighten monetary policy as other central banks signal loosening, according to Nikkei.
• Japan’s ruling LDP tax reform panel agreed on income tax breaks aimed at offsetting the impact of price increases on households, according to Reuters.
• Chinese Commerce Ministry says external demand shows signs of warming up
• Fitch Ratings says “Australia’s continued revenue outperformance and prudent fiscal management, with the government saving most of its revenue windfall, remain supportive of its ‘AAA’/Stable sovereign rating”
• China’s Beijing government says it is to reduce the minimum down payment for new mortgages; payment ratio will be lowered to 30%

European equities, Eurostoxx50 (+0.7%), are firmer with clear outperformance in the FTSE 100 (+2.0%) benefitting from gains in Basic Resources. European sectors are entirely in the green with the exception of Insurance; sectoral performance today is guided by lower interest rate expectations, which has led Real Estate to the top of the pile. US equity futures are trading higher after a dovish FOMC policy announcement on Wednesday, where the US central bank signalled that three 25bps rate cuts were coming in 2024; the RTY (+0.9%) outperforms after soaring 3.5% yesterday.

Top European News

• German DIW lowers domestic growth forecasts. 2024: 0.6% (prev. 1.2%), 2025 1.0% (prev. 1.2%)
• Germany’s IFO lowers its 2024 GDP growth forecast to 0.9% from +1.4% previously; upgrades 2025 to +1.3% from +1.2%
• Around 65% of EV cars sold in France will be eligible for a new state bonus scheme, via Reuters citing sources

Central Banks: SNB

• Maintains its Policy Rate at 1.75% as expected; prepared to be active in the FX market as necessary (removed reference to “selling”)
• Will adjust its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term. (Prev. “it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term.”)
• Click here for more details.
• SNB Chairman Press Conference: SNB is no longer focussed on selling FX. This reflects that monetary conditions are currently appropriate; does not forecast any tightening given the forecasts so far; rate cuts were not part of the discussion today.

Central Banks: Norges Bank:

• Unexpectedly hikes its Key Policy Rate to 4.50% from 4.25% (exp. a hold at 4.25%); The forecast indicates that the policy rate will lie around 4.5% until autumn 2024 before gradually moving down
• The policy rate is likely close to the level required to return inflation to target within a reasonable time horizon. On the other hand, inflation is high, and the krone depreciation makes it more challenging to bring down inflation.
• If cost inflation remains elevated or the krone turns out to be weaker than projected, price inflation may remain higher for longer than currently projected. In that case, the Committee is prepared to raise the policy rate again.
• If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lowered earlier than currently envisaged.

FX

• A subdued morning for the broader Dollar and index in a continuation of the losses seen after markets were surprised by the extent of the Powell pivot.
• The Sterling and EUR modestly gain against the USD compared to some G10 peers are participants look ahead to the BoE and EUR confabs.
• JPY is the top gainer in the European morning amid the hefty fall in the Dollar and US yields.
• AUD, NZD, CAD are among the top gainers following the boost to risk sentiment and the Fed-induced surge in commodity prices.
• EUR/CHF initially immediately moved lower (following the SNB) from 0.9499 to 0.9460 before recoiling back to highs of 0.9518 and then stabilising just under pre-announcement levels around 0.9492.
• A hike at the Norges Bank sparked marked NOK appreciation against both the EUR and USD. USD/NOK fell from 10.70 to 10.60 before falling to a 10.5860 trough.
• PBoC set USD/CNY mid-point at 7.1090 vs exp. 7.1566 (prev. 7.1126).

Fixed Income

• USTs are comparably contained, given US-specific risk events have now passed, with upside of around 20 ticks having extended marginally above Wednesday’s best; 10yr yield still sub-4.0%.
• Gilts have similarly trimmed from a 101.69 best but still hang on to upside in excess of 100ticks, likely given recent relative underperformance in Gilts.
• Bunds are holding just below the 137.00 mark having trimmed incrementally from the initial 137.28 high as newsflow slows slightly and attention turns to Lagarde.

Commodities

• WTI Jan and Brent (+2.0%) Feb futures remain on a firmer footing in a continuation of the fallout from the FOMC policy announcement and press conference, which ultimately was more dovish than expected.
• Spot gold was catapulted by the demised in the Dollar and yields following the Fed statement and press conference, with the opening candle at the time at USD 1,982.35/oz; Base metals similarly surged although gains overnight were capped by the mixed APAC mood.
• IEA OMR: trims 2023 global oil demand growth forecast by 90k to 2.3mln BPD; 2024 demand forecast raised by 130k to 1.1mln BPD citing improved GDP outlook
• BofA expects ULSD to Brent cracks to average USD 26/bbl in 2024 (vs average USD 36/bbl this year)
• Citi (C) says “COP28 momentum for renewables is super-bullish for metals demand and fossil fuel aspirations more challenging”

Geopolitics

• US National Security Adviser Sullivan met with Saudi’s Crown Prince MBS and discussed the humanitarian response in Gaza including efforts to increase the flow of critical aid, according to the White House.
• US is reportedly holding up the licences for selling over 20k rifles to Israel due to concerns about attacks by extremist Israeli settlers against Palestinian civilians in the West Bank, according to sources cited by Axios.
• US, Japan and Philippines national security advisers held a call and expressed concerns about China’s recent dangerous and unlawful conduct in the South China Sea, according to Reuters.
• Chinese Embassy in Canada said China condemns Canada’s support for the Philippines in violating China’s sovereignty in the South China Sea, according to Reuters.
• Iranian Defense Minister says the US “will face major problems if it wants to form an international force in the Red Sea”, according to Al Jazeera; adds “We have control in the Red Sea and all countries are present in it and no one can manoeuvre there”

US Event Calendar

• 08:30: Dec. Initial Jobless Claims, est. 220,000, prior 220,000
  • Dec. Continuing Claims, est. 1.88m, prior 1.86m
• 08:30: Nov. Retail Sales Advance MoM, est. -0.1%, prior -0.1%
  • Nov. Retail Sales Ex Auto and Gas, est. 0.2%, prior 0.1%
  • Nov. Retail Sales Ex Auto MoM, est. -0.1%, prior 0.1%
  • Nov. Retail Sales Control Group, est. 0.2%, prior 0.2%
• 08:30: Nov. Import Price Index YoY, est. -2.1%, prior -2.0%
  • Nov. Import Price Index MoM, est. -0.8%, prior -0.8%
• 08:30: Nov. Export Price Index YoY, est. -5.2%, prior -4.9%
  • Nov. Export Price Index MoM, est. -1.0%, prior -1.1%
• 10:00: Oct. Business Inventories, est. -0.1%, prior 0.4%

DB’s Jim Reid concludes the overnight wrap

Yesterday’s FOMC meeting did its best to give investors an early Christmas present, all packaged with a bow and extra special gift wrapping. In turn this added more fuel to the soft landing narrative. Our 2024 outlook has 175bps of Fed cuts in it but this is premised on a mild recession. One change to a dot plot doesn’t automatically completely change the direction for the economy but the risks that the Fed stubbornly hold in restrictive territory while the lag of policy hits has been reduced by their change of tone .

Markets were very bulled up by the move and the positive market reaction to the initial decision gained further traction during Powell’s conference. By the end of the day, 2yr treasury yields were down over 30bps and the S&P 500 reached a record high in total return terms. The bond rally has extended overnight, with 10yr yields (-3.38bps) falling below 4% as I type. We’ll see if European central banks are anywhere near as festive today, with the ECB and BoE decisions due later. Don’t forget US retail sales and initial jobless claims too.

Starting with the Fed details, a dovish shift was signalled first of all by the updated SEP dot plot, with the median FOMC member moving to expect 75bps of rate cuts in 2024 (from 50bps before but from a lower peak). The number of officials seeing risks to inflation as titled to the upside also went down from 14 to 8 (out of 19), with most now seeing risks as balanced. In the statement, there were dovish tweaks on inflation and activity, while the previous hawkish bias was toned down, adding “any” in its reference to “the extent of any additional policy firming that may be appropriate”.

Powell confirmed in the press conference that participants no longer expected further hikes, although they did not want to take the possibility off the table. Further, he stated that a “preliminary” discussion around rate cuts took place at the December meeting and offered no direct pushback when asked about recent market pricing. There were one or two elements of caution in his comments, indicating that “no one is declaring victory”. But overall he struck an optimistic tone on the progress made in fighting inflation, validating a dovish risk-on takeaway. Following the FOMC, our US economists maintain the expectations of 175bps of cuts from the Fed in 2024 starting in June, but with heightened risks that rate cuts could come as early as March. See their full reaction note here.

Following the Fed, money markets moved to price earlier and more aggressive rate cuts, with fed funds futures overnight moving to fully price a 25bps cut by the March meeting (up from a 43% chance as of Tuesday and 92% at yesterday’s close). And ~150bps of rate cuts are priced by end-24 as I type, up from 110bps this time yesterday.

Bonds rallied sharply, with 2yr and 10yr treasury yields falling by c. 15bps and 10bps respectively immediately after the Fed decision, and declining further during Powell’s press conference and overnight. 2yr yields were down -30.3bps yesterday to 4.43%, their biggest daily decline since March, and are trading another -5.2bps lower overnight. Meanwhile, the 10yr closed -18.5bps lower at 4.02%, its lowest in four months. It has extended the decline to 3.98% as I type. A remarkable turnaround since the 10yr traded above 5% intra-day on October 23. The major bull steepening in US rates has provided a challenging backdrop for the dollar,with the broad dollar index down -0.96% yesterday and around another -0.28% this morning .

Equities rallied strongly on the Fed’s upbeat message. The S&P 500 had been trading near flat on the day prior to the FOMC but rose by half a percent immediately after the decision, and by a similar amount during Powell’s press conference. It was +1.37% by the close, up to its highest level in nearly two years. The bigger milestone for the S&P 500 came in total return terms, which reached a new record high (eclipsing the peak of January 2022). The year-to-date total return on the index is now +24.5%. Across sectors, tech mega caps underperformed in the broad rally (Magnificent Seven +0.64%). On the other hand, small caps strongly outperformed with the Russell 2000 (+3.52% yesterday) approaching bull market territory, having risen 19% from its trough in late October. S&P 500 (+0.38%) and NASDAQ 100 (+0.53%) futures are rising further this morning.

Looking back at yesterday prior to the Fed decision, US Treasuries had already got some momentum from a softer-than-expected PPI reading for November. In particular, t he core measure excluding food and energy was at just +0.1% (vs. +0.2% expected), which took the year-on-year measure down to +2.0% (vs. +2.2% expected), marking its lowest level since January 2021. Some of the PPI components feed into the Fed’s preferred PCE measure of inflation, so all things being equal the decline offers further support for the prospect of rate cuts next year.

Looking forward now, central banks will stay in the spotlight today, as both the ECB and the Bank of England are also announcing their latest policy decisions. For the ECB, it’s widely expected that they’ll be leaving their policy rate unchanged for a second consecutive meeting. But as with the Fed, speculation about rate cuts has mounted considerably in recent weeks, particularly after the latest inflation data showed CPI falling to 2.4% in November. At today’s press conference, our European economists expect the ECB to acknowledge this faster-than-expected decline, but to be coy about declaring victory prematurely. They think they’ll keep the guidance that maintaining restrictive rates for sufficiently long will bring inflation back to target in a timely manner, and they don’t expect the ECB to cut rates until April even if March is an increasing risk. See their full preview here.

Here in the UK, the Bank of England will also be deciding on rates, and it’s similarly expected that they’ll remain on hold. For now at least, the inflation situation in the UK remains comparatively worse than the US and the Euro Area, since CPI was still at 4.6% in October. So markets are pricing a slower pace of rate cuts from the BoE relative to the Fed and the ECB, with just 35bps of cuts priced in by the June meeting although this might change this morning. Moreover, our UK economist still expects there to be a split vote tally at the latest meeting, with 3 of the 9 members continuing to vote in favour of another 25bp hike. Looking forward, he expects rate cuts from Q2 2024, but thinks the risks of a delay are mounting. See his full preview here.

Ahead of those, European equities put in a steady performance before the Fed’s decision, with the STOXX 600 (-0.06%) posting a slight decline, just as sovereign bond yields fell to their lowest in months thanks to that US PPI reading. For instance, yields on 10yr bunds were down -5.4bps to 2.17%, and those on 10yr OATs were down -6.0bps to 2.71%. In both cases that’s their lowest level in 8 months. Moreover, gilts saw an even larger decline, with the 10yr yield down -13.5bps to 3.83%. That followed the release of monthly GDP data for the UK, which fell by -0.3% in October (vs. -0.1% expected), and led investors to become more confident about the prospect of BoE rate cuts next year. Expect to see these yields gap lower at the open after the Fed move last night.

Asian equity markets are continuing the rally this morning with the KOSPI (+1.32%) leading gains closely followed by the Hang Seng (+1.11%) while the CSI (+0.25%) and the Shanghai Composite (+0.30%) are also edging higher but with the China move subdued again. Meanwhile, the Nikkei (-0.86%) is on the weaker side reversing its initial gains as the Yen drives higher (+0.78%) to 141.77 after the FOMC .

Early morning data showed that core machine orders in Japan unexpectedly advanced +0.7% m/m in October (v/s -0.4% expected) as against an increase of +1.4% in the previous month. However, it remained down year-on-year (-2.2%) as uncertainty about the global economy pared companies’ appetite for fresh investments.

In other news yesterday, the German government reached a political agreement on how to rework the 2024 budget. Overall consolidation needs are in line with our economists’ earlier estimates (EUR 30bn), leading to a tighter fiscal stance for 2024 and slightly higher inflation. A loophole for a potential suspension of the debt brake in case of higher Ukraine support has been left open. See our Germany economists’ report here for details.

To the day ahead now, and the main highlights will be the monetary policy decisions from the ECB and the Bank of England. Otherwise, US data releases include the weekly initial jobless claims and retail sales for November.