The Final ‘Fed Day’ Of 2024

WHERE WE STAND – Anyone else getting the vibe that folk have already put their feet up for Christmas, and are done with 2024?

That’s certainly the feeling I got while commuting on comparatively empty trains yesterday, and also the feeling that financial markets appear to have, with price action subdued for a second straight day yesterday.

Of course, we can’t be ‘officially’ done and dusted just yet, and there’s the small matter of an FOMC decision to navigate later today, but it’s clear that participants lack conviction to do anything much at all as the final ‘proper’ trading week of 2024 progresses.

That isn’t to say there’s a shortage of catalysts, with Tuesday actually presenting a fair few things of note for participants to digest.

Let’s start here in the UK, where the latest employment data – which remains rather unreliable – showed joblessness holding steady at 4.3% in the three months to October, while both regular and overall earnings grew by 5.2% YoY over the same period, these latter prints being considerably above consensus expectations. Not only that, such a pace of earnings growth is clearly incompatible with a sustainable medium-term return to the BoE’s 2% inflation aim, even if earnings growth was boosted by an unfavourable base effect from last year, and the start of summer’s above-inflation public sector pay rises feeding into the data.

In any case, the figures killed stone dead the already-slim chances of any BoE action tomorrow, with the GBP OIS curve also trimming the chances of a 25bp cut in February to around a 60% chance, from over 80% at the start of the week. The pound also strengthened, with cable reclaiming the 1.27 handle intraday, while gilts sold off across the curve, as 10-year yields rose north of 4.50%, and 30-year yields climbed above 5% to the highest level since 2023. Fading GBP strength would also be my preferred play.

I do think, on the whole, that the market might be getting overly hawkish here, and would be inclined to fade any further selling if, say, 10-year yields rise another 10bp. My base case remains that the MPC will probably cut 25bp once per quarter next year, with the next such cut coming at the February meeting. Risks to that view are tilted to the dovish side, given the potential for increased labour market softness to crush demand, thus quickening the pace of services disinflation, and unlocking a potential faster pace of policy normalisation from the second quarter onwards.

Across the pond, participants deftly dealt with the November US retail sales report, which showed headline sales having risen by 0.7% MoM last month, marginally above expectations. Meanwhile, the key ‘Control Group’ metric, broadly representative of the basket used in the GDP report, rose 0.4% MoM, bang in line with consensus. The old adage of ‘never betting against the US consumer’ continues to ring true, while sales are likely to be further boosted in December, given the late occurrence of Thanksgiving this year, which will push a significant degree of holiday spending into the final month of the year.

Stocks, though, did trade marginally softer on the day, with both the S&P 500 and Nasdaq 100 losing ground, as conviction remains somewhat lacking, both ahead of the FOMC, and as year-end approaches and participants seek not to chase further returns with the index already >25% higher YTD.

Back in Europe, pigs might well be flying soon, with that rarest of occurrences taking place yesterday – German economic data surprising to the upside!

The data in question was the monthly ZEW sentiment survey, where the ‘expectations’ index rose to 15.7, its highest level since August. Still, before those pigs do take off, it’s worth bearing in mind that the IFO sentiment survey, also out yesterday, pointed to the lowest ‘business climate’ figure since May 2020. Clearly, the German economy is far from being out of the woods, particularly as elections loom in mid-February.

The EUR, though, remains relatively impervious to negative catalysts for now, having yesterday spent a 4^th straight day treading water around the $1.05 handle. It feels too early to call ‘peak pessimism’ just yet, though as we conveniently sit right in the middle of this range, I stand by my call that spot trades to $1.10 before printing parity.

LOOK AHEAD – Here we go then, the final ‘Fed Day’ of 2024 is upon us and, dare I say it, probably the final ‘proper’ trading day of the year for most as well.

What to expect from Powell & Co., then? A 25bp cut is nailed on, after unemployment unexpectedly rose to 4.2% in November, and after both headline and core CPI rose in line with expectations, at 2.7% and 3.3% respectively, last month. Furthermore, given the FOMC’s longstanding desire not to ‘rock the boat’, the USD OIS curve discounting a 95% chance of a 25bp cut is probably enough on its own to see one delivered, no matter what the data may be saying.

Such a cut, though, is likely to be a ‘hawkish’ one, as Powell attempts to build greater optionality into the FOMC’s policymaking in 2025, amid increasing upside inflation risks, with the labour market still tight, and with potential trade tariffs set to be imposed once President-elect Trump takes office. Hence, we are again unlikely to see any firm pre-commitments as to the future path that the fed funds rate will take, with Powell instead likely to repeat that data will guide the FOMC in terms of the speed at which rates return to neutral, and that the FOMC can be “cautious” in finding said neutral rate, while also being able to slow the pace of easing were data to permit them.

The updated ‘dot plot’, meanwhile, will likely show a more hawkish path than that issued in September. Then, the median expectation saw the fed funds rate falling to 3.375% by the end of next year, while the December plot will likely see that median revised 25bp higher, with the longer-run rate estimate likely also nudged higher by the same magnitude. The dispersion of 2025 dots, meanwhile, is set to be considerably tighter, as downside risks to the dual mandate recede.

Besides the FOMC, today presents another couple of interesting events. This morning’s UK CPI figures should show inflation having risen once more last month, to 2.6% YoY on a headline basis, and to 3.6% on the core print, both +0.3pp compared to October. Elsewhere, the Bank of Japan should hold rates steady in the early hours of Thursday morning, as has already been indicated by an inordinate number of pre-meeting ‘sources’ reports.