Tuesday’s Federal Open Market Committee (FOMC) minutes revealed a unanimous decision by US Federal Reserve (Fed) officials to maintain the benchmark lending rate within the 5.25% to 5.5% range for the second consecutive meeting.
In addressing concerns about inflation, participants stressed the importance of further tightening if progress toward the committee’s inflation target was considered insufficient. Despite some moderation, US inflation remains stubbornly above the 2% long-term objective, posing challenges for businesses and households, particularly those with lower incomes.
Integral to the broader strategy is the reduction of the Fed’s balance sheet, a point underscored in the minutes. Some participants even suggested that this process could persist beyond a reduction in the target range for the federal funds rate.
The minutes also shed light on concerns about the potential impact of tighter financial and credit conditions on economic activity, hiring, and inflation. The labour market, although tight, has seen some easing, and the current restrictive monetary policy is acknowledged to be exerting downward pressure on economic activity as well as inflation.
Amid the recognised high degree of uncertainty in the economic outlook, policymakers underscored the need for careful consideration in decision-making. Risks include the potential stall in disinflation progress, a resurgence in inflation due to economic momentum, and downside risks to economic activity. Participants expressed readiness to adjust monetary policy as needed, signalling a nuanced understanding of the risks at play, but explicit mention of rate cuts was noticeably lacking in the minutes.
Market reaction following the minutes’ release was modest, with the US Dollar Index experiencing a slight gain. Thin holiday trade, however, saw the dollar carry these gains into the latter part of the week.
The minutes portray a pragmatic approach, as the Fed attempts to balance the need for continued caution in monetary policy with an acute awareness of the challenges and uncertainties in the economic landscape.
US stocks closed higher on Wednesday, with the S&P 500 and Nasdaq each gaining 0.4%, and the Dow Jones rising 184 points ahead of Thursday’s Thanksgiving holiday, despite durable goods orders falling more than expected. The positive momentum was driven by tech, communication services, and consumer discretionary sectors. Online retailer Amazon and technology company Microsoft saw notable gains, reaching record highs, while aircraft manufacturer Boeing rose 0.7% after the Federal Aviation Administration cleared the 737 Max 10 jet for test flights. However, computer processor manufacturer NVIDIA faced a 2.5% decline due to underwhelming results, and agricultural equipment company Deere & Company dropped 3.1% after a lower-than-expected profit forecast.
In the United Kingdom (UK), the FTSE 100 remained steady on Thursday after three consecutive sessions of losses. Travel and leisure stocks, along with precious metal miners, were the top decliners, while oil and gas shares climbed 0.8%, led by BP’s 1.6% gain. Flash purchasing managers’ index (PMI) data indicated a stabilisation in the UK private sector, with the expansion in the service economy offset by a decline in manufacturing production. Independent energy regulator, Ofgem, increased its price cap by 5% to address rising wholesale energy prices. Corporate updates included financial services brand Virgin Money reporting profits below market estimates, and low-cost airline Jet2 posting a significant 19% increase in operating profit.
Frankfurt’s DAX 40 maintained modest gains, reaching its highest level since 10 August at 15,970 points. Investors awaited the minutes of the European Central Bank’s (ECB’s) October meeting, which factored in expected interest rate cuts. The latest PMI data for Germany indicated a milder contraction in the private sector.
A LOOK AT GOLD AND OIL
Brent crude futures slipped below $81/barrel on Thursday, extending losses from the previous session after US crude inventories surged by a staggering 8.7 million barrels, far surpassing the expected 1.16 million barrel increase. The abundance of supply, especially from non-OPEC nations, has cast a shadow on oil prices, prompting speculation about potential extensions or deepening of supply cuts by the expanded Organisation of the Petroleum Exporting Countries, OPEC+. On Wednesday, crude prices took a nearly 5% hit before recovering as OPEC+ postponed its policy meeting to resolve disputes over output quotas for African members like Angola and Nigeria. Analysts anticipate Saudi Arabia will extend its voluntary production cuts into 2024, while other members are likely to commit to existing quotas.
Gold stabilised above $1,990 an ounce on Thursday, close to its six-month high. Investor focus remains on the Fed’s monetary policy outlook. Despite a larger-than-expected drop in new claims for unemployment benefits and a modest increase in US inflation expectations, the latest FOMC minutes revealed a preference for maintaining a restrictive monetary policy, with no imminent indication of rate cuts. Market consensus leans towards the Fed maintaining rates in December, with reduced expectations for cuts in March. In the eurozone, the ECB appears to have concluded its rate hikes, with some investors anticipating a possible rate cut in April next year. Meanwhile, in China, the People’s Bank of China left its one and five-year loan prime rates unchanged at the November fixing, at 3.45% and 4.2% respectively, in line with market expectations.
The US Dollar Index maintained its position around 103.8 on Thursday, supported by robust data that prompted a reassessment of the Fed’s monetary policy outlook. However, trading volumes remained thin due to holidays in Japan and the US. Wednesday’s data revealed a greater-than-expected decline in new claims for unemployment benefits, accompanied by heightened inflation expectations for both the near and long term.
The euro surpassed $1.09/€, nearing its late August peak, following the release of ECB meeting minutes. Policymakers emphasised the potential for further rate hikes, despite expectations that the Central Bank has ended its rate hiking cycle. Simultaneously, the latest PMI survey indicated a slower contraction in eurozone business activity for November, despite ongoing employment declines since the start of 2021 and a six-month high in input cost inflation. Divergent views coming from ECB policy makers, including dovish comments from the Governor of the Bank of Portugal, Mario Centeno and President of Deutsche Bundesbank Joachim Nagel suggesting that rates are close to their peak, have contributed to market uncertainty.
The pound consolidated gains above $1.25/£, reaching its highest level since early September, fuelled by shifting expectations regarding the Bank of England’s (BoE) timeline for cutting rates. Stronger-than-anticipated flash PMI data revealed stabilised private sector activity in November, prompting investors to perceive a higher likelihood of a 25 basis-point BoE rate cut, with a September 2024 cut now viewed as an inevitability by the market.
The pound started the day trading at 1.2530/$ and 1.1490/€.
Written by Citadel Global Director, Bianca Botes.
Sources: Refinitiv, Reuters, Investing.com, Trading Economics and Federal Reserve.
Written by Citadel Global Director, Bianca Botes
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