Weekly | Monetary Tug of War
Your weekly summary with the most important news for your investments.
Your weekly summary with the most important news for your investments:
Federal Reserve (FED) Expectations
Stock Market Performance
Business and Geopolitical Developments
Last week, US equity and fixed income markets moved horizontally, most likely awaiting the Federal Reserve's open committee message, which will be accompanied by a verbal intervention by its chairman, Jerome Powell, along with the Fed's macroeconomic projections for 2024, where agents estimate that there will be a cut in the monetary policy rate by the end of the year of at least -100 basis points to leave it at 4.5% (from the current 5.5%).
However, those market expectations may be too premature as core inflation is still hovering around 4% and the change in inflation expectations is too closely correlated to the price of oil. Following the Fed's decision on Wednesday afternoon, December 13, on Thursday morning the central banks of the Euro Zone (ECB) and the United Kingdom (BOE) will be outlining their next steps on monetary policy, probably arguing, like the Fed, that it is still premature to talk about interest rate cuts. This is creating a tug-of-war in the stock market as we close out a year of extraordinary returns:
With the Dow accumulating a +9.4% rise.
The S&P 500 up +19.9%.
The Nasdaq climbing an extraordinary +37.6%, with only a couple of weeks to go until the close of 2023.
Meanwhile, as the stock market rally was forged, the 10-year Treasury bond rate eased from nearly 5% in mid-October to 4.12% last Wednesday (currently at 4.23%) ratifying not only a lower inflation scenario, but also a lowering of future interest rates.
On the corporate front:
Insurance company Cigna was unable to reach a buyout agreement for its competitor Humana so it will manage a US$10 billion share buyback program. Meanwhile, over the weekend, a group of investors made a US$5.8 billion offer to buy the retail chain Macy's, as the company has not been able to adjust adequately to the change of model in recent years. Meanwhile the back-and-forth between Elon Musk, owner of the X platform (formerly Twitter) and CEO of Tesla, with Disney CEO Bob Iger became more present during the week, as Disney opted to stop investing in X advertising. However, Musk in his most combative tone, through his platform, was more explicit in arguing that Meta (through Facebook and Instagram) was doing further damage to Disney's brand product of the algorithms it had been using.
In academia:
After several days in which the presidents of Harvard, MIT and Pennsylvania Universities chose to abstain, in front of Congress in open forum, condemning the anti-Semitic movements that have been occurring at their educational institutions in recent months, this led to Penn State President Liz Magill, along with Penn State Board Chair Scott Bok, having to resign as donations from big businessmen to the university, in just a matter of days, suffered a setback.
In the midst of this, Ukraine's President Volodymyr Zelensky will be stopping by President Biden's offices in a bid to unlock financial aid by 2024 to protect his country from Russian invasion. While the war between Israel and Hamas continues unabated with the Israeli government attacking the border with Lebanon to prevent Hezbollah's intrusion into the north of the country. Additionally, yesterday Javier Milei was appointed as President in Argentina who not only announced a cabinet reduced by half but is expected to manage new foreign exchange and economic announcements today.
On the macroeconomic front:
As mentioned above, the focus will be on the Fed which will enter this meeting not only knowing November employment data released last Friday, but inflation data to be released tomorrow. The outlook is as follows: the economy generated 199 thousand new jobs, beating market expectations, the unemployment rate eased to 3.7% (from 3.9%) while wage inflation remained at 4%.
Market participants estimate that tomorrow headline inflation will marginally ease to 3.1% (from 3.2%) and core inflation, which excludes food and energy prices, will remain at 4%. We already know that the previous month's PCE inflation readings were 3% (from 3.4%) and 3.5% (from 3.7%), respectively. But here is the Fed's tug-of-war: even if there is room to reduce the real rate towards a more neutral level by taking the instance rate towards 4.5%, as market participants expect, for now there are consistent indications that core inflation is still hovering around 4%. In addition, the unemployment rate fell again and consumer expectations rebounded not only because of a more robust labor market, but also because of the fall in the price of oil (and therefore gasoline). This is directly in line with the analysis we managed on October 30 called "Energy Dislocation" where we argued that the Fed would be waiting on the price of oil (and gasoline). However, without core and wage inflation not having fallen below 4%, the Fed is unlikely to change its tune or send an overly pro-cyclical message in an uncertain environment with two wars behind it that can change the direction of the oil price in a matter of seconds.
In conclusion, the tug-of-war over monetary developments will continue going into 2024 with the Fed maintaining its anti-inflationary discourse in an effort to anchor long-term expectations and not rely strictly on oil price developments to manage monetary policy. For those of us who celebrate Hanukkah, may it be a year full of light and blessings.
This Week
Monday (December 11)
Quarterly Reports
Oracle Corporation
Caseys General Stores, Inc.
Korea Electric Power Corporation
Blue Bird Corporation
Value Line, Inc.
Economic Reports
Consumer Inflation Expectations Report
Tuesday (December 12)
Quarterly Reports
BHP Group Limited
Johnson Controls International plc
SatixFy Communications Ltd.
Chindata Group Holdings Limited
Mesoblast Limited
Economic Reports
Monthly Inflation Rate Change Report
Annual Inflation Rate Change Report
Monthly Change in Core Inflation Rate Report
Core inflation rate annual change report
Wednesday (December 13)
Quarterly Reports
Adobe Inc.
Nordson Corporation
SK Telecom Co., Ltd.
ABM Industries Incorporated
Photronics, Inc.
Economic Reports
Producer Price Index Report
Fed's Monetary Policy Decision
Federal Open Market Committee Economic Projections
Thursday (Dec. 14)
Quarterly Reports
Costco Wholesale Corporation
Lennar Corporation
Jabil Inc.
Manchester United Ltd.
Azul S.A.
Economic Reports
Retail Sector Sales Report
Friday (December 15)
Quarterly Reports
Darden Restaurants, Inc.
Daily Journal Corp.
Gencor Industries Inc.
PhenixFIN Corporation
MIRA Pharmaceuticals, Inc.
Economic Reports
NY Empire State Manufacturing Index Report
Now you have more information about your investments. See you next week with more news.
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