The latest insights from the United States (US) Federal Reserve (Fed) are that policymakers are maintaining a cautious stance on reducing interest rates, waiting for clear signs of a sustained downtrend in inflation. The minutes from the recent Federal Open Market Committee (FOMC) indicate a reluctance to implement early rate cuts in March, reflecting concerns about the risks associated with moving too quickly.
In the FOMC meeting, which took place from 30 to 31 January, policymakers acknowledged that borrowing costs may have peaked but the exact timing of the first rate cut remains uncertain. With expectations for early and aggressive rate cuts tempered, traders now anticipate that first cut will not occur until June.
Looking ahead, Fed Chair Jerome Powell is set to testify before Congress in early March, providing fresh insights into the economic outlook. The upcoming meeting, which will take place from 19 to 20 March, will offer an opportunity for Fed officials to update projections for rates and the economy.
Despite some members highlighting the potential risks of delaying rate cuts, the majority of the FOMC members underscored the importance of evaluating incoming data thoroughly. The focus remains on ensuring that inflation steadily moves toward the 2% target. Only then will the Fed consider any adjustments to monetary policy.
Overall, the Fed’s cautious approach reflects a balance between addressing US inflation concerns and supporting economic growth. While uncertainties persist, policymakers are committed to a data-driven approach in navigating the complex economic landscape. However, as policymakers navigate inflation risks and economic uncertainties, markets will await further clarity from upcoming meetings and testimonies, shaping expectations for the future trajectory of interest rates.
A LOOK AT THE MARKET
Tech titans propel US stocks to fresh highs
US stocks surged on Thursday, with the S&P 500 seeing a remarkable 2.1% leap to reach a new record high. The Nasdaq followed suit, jumping 3.0%, while the Dow Jones gained roughly 450 points, all thanks to Nvidia’s stellar performance. The semiconductor giant’s shares skyrocketed over 11%, to hit an unprecedented $785.38-high after reporting record-breaking revenue and issuing bullish forecasts. This robust demand underscores expectations for the ongoing AI-driven rally. Mega-cap tech stocks mirrored the enthusiasm, with Microsoft, Amazon, and Meta among the gainers. Other semi-conductor stocks, such as Advanced Micro Devices and Micron, also saw sharp upticks. Despite a hawkish Fed stance, traders seemed unfazed by the delay in rate cuts, focusing instead on positive economic indicators. S&P Global PMIs (purchasing mangers’ index) and unexpected drops in US initial jobless claims further buoyed market sentiment.
In Europe, Frankfurt’s DAX 40 was up marginally as the effect of Nvidia’s promising revenue projections was somewhat offset by vehicle manufacturer Mercedes-Benz Group announcing declining sales, while multinational online food delivery company Delivery Hero faced a setback with the termination of talks for the sale of its foodpanda business.
In the UK, the FTSE 100 finished up, fuelled by upbeat earnings, including a notable 57% profit surge from Lloyds Banking Group. Jet engine manufacturer, Rolls-Royce Holdings, also reported a return to pretax profit.
Asian stocks saw significant gains, with Japan’s Nikkei 225 Index surging 2.19% to surpass a previous all-time high set during the 1989 bubble. Technology stocks, strong domestic profits, and a favourable export outlook fuelled the rally. However, Japan’s private-sector activity showed signs of slowing amid manufacturing contraction.
Oil holds steady and gold gains
Brent Crude futures stabilised around $83/barrel, reflecting a near 1% increase from the previous session, fuelled by a positive demand outlook. US refinery outages, including BP’s Indian facility and TotalEnergies’ Texas refinery, contributed to supply constraints. Eyes are now on the US Energy Information Administration’s weekly data, which should provide further market insights. In the geopolitical arena, concerns persist over the timing of a ceasefire in Gaza and ongoing Houthi assaults on Red Sea shipping, which are helping to maintain a risk premium on oil prices. Additionally, recent data revealed Iraq’s failure to comply with the Organization of the Petroleum Exporting Countries’ (OPEC’s) output cut in January, adding another layer of uncertainty to the market.
Meanwhile, gold climbed toward $2,030/ounce, extending gains for a sixth consecutive session. The dollar’s weakness, in spite of hawkish Fed rhetoric, propelled gold’s ascent. Fed meeting minutes underscored officials’ caution regarding rapid rate cuts, potentially delaying an easing cycle. Traders, having relinquished expectations for rate reductions in March and May, now anticipate a possible 25 basis point cut in June, with odds standing at approximately 53%. Investors eagerly await flash PMI reports for insights into the US private sector’s performance. Furthermore, gold’s allure as a safe-haven asset strengthened amidst escalating tensions in the Middle East, adding to its bullish momentum.
Currency markets digest economic data
On Thursday, the US Dollar Index dipped slightly below 104 as traders analysed the monetary and economic landscape. The latest FOMC minutes revealed the Fed’s cautious stance on interest rate cuts, while economic indicators painted a mixed picture, with US private sector activity slowing in February, though manufacturing output rebounded.
The euro remained resilient above $1.085/€, buoyed by tempered expectations for European Central Bank rate cuts amidst signs of a slowing in the rate at which eurozone business is contracting. Sterling strengthened above $1.265/£ following robust UK PMI data, indicating the fastest private sector expansion since May, driven by service sector growth and inflationary pressures.
Key Indicators:
GBP/USD: 1.2656
GBP/EUR: 1.1695
Gold: $2,026.36
Oil: $83.29
Sources: Bloomberg, Reuters and Trading Economics.
Written by Citadel Global Director, Bianca Botes
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