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A week is a long time in markets, as this past week has proved.
Powell’s “dovish pivot” at the December FOMC last week happened faster than most market pundits predicted, with Powell’s speech being far more aggressive than the market expected towards reducing rates due to the accelerated drop in Core CPI and increased evidence of economic slowing, seeing the Fed shift from a neutral stance to an easing bias in last week’s meeting.
While the Fed holding interest rates steady was widely expected, the dot plot released following FOMC showed most officials expecting three interest rate cuts in their projections. This was surprisingly dovish and was the primary driver of a further drop in bond yields, with the 10-year treasury now below 4%, representing a near 100bp decline since the late October peak.
Remember, it was only back in September that Fed officials predicted a further interest rate hike at the December FOMC, so we take the latest dot plot with a grain of salt and use it as one of the many macroeconomic data points we track closely and assess for signals.
Regarding economic statistics, in the US, consumer price inflation moderated to a 3.1% annual pace in November. Still, the core CPI remains somewhat sticky, up 0.3% MoM and unchanged at 4% on a YoY basis. Regarding economic momentum, retail sales advanced 0.3% MoM (from -0.2%), and industrial production grew 0.2% MoM (from -0.9%). Looking ahead, S&P Global flash PMIs for December showed a persistent decoupling between mfg. (48.2, from 49.4) and service industries (51.3, from 50.8). Last, the NFIB ticked down to 90.6 (from 90.7), with a net negative 17% of small business owners reporting higher sales in the past three months (the lowest reading since July 2020).
These data points favor the soft-landing narrative, but it is still too early to tell. Remain vigilant with PCE later this week, the last key data point to be reported for 2023. Whether Powell’s pivot was enough to turn a tactical rally into a fundamentally driven bull market remains to be seen, but we are sure off to a solid start.
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