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FOMC Minutes Demonstrate a Disconnect

November 22, 2023

The FOMC minutes demonstrated the disconnect which exists between the central bank’s expectations and those of the market, with investors wishing for a level of rate-cutting in 2024 that the Fed currently does not foresee. While traders have begun positioning for policy loosening to be taking place by mid next year, evidently the Fed is not sharing this same mindset. The November meeting minutes showed that the FOMC is still in defensive mode when it comes to fighting inflation, which runs counter-narrative to the market sentiment in the wake of the soft inflation readings last week. So, the absence of attention to potential 2024 rate cutting from the Fed effectively poured some cold water on the market.

So too, it seems, did the Nvidia earnings. Taken in isolation, the numbers from Nvidia’s Q3 earnings report were more than solid with EPS and revenue both exceeding expectations. But in the context of a near 250% jump in the stock price already this year, it becomes more difficult for Nvidia to ‘wow’ a market which has already been singing its praises throughout 2023. A warning from the company about how export restrictions could hamper sales to some regions (including China) also dampened the mood, with the stock dropping around 1% in after hours trading. Sentiment around this Q3 result from the market’s darling stock may yet turn around, but early indications are that it may not have delivered the same boost to broader equity market enthusiasm witnessed after the Q1 and Q2 reports.

The absence of rate-cut-chat from the Fed minutes arrested the decline of the USD and treasury yields, though it will probably take some stronger macro data to turn the momentum in the greenback’s favour. Despite the tone of the Fed, markets are still beginning to price in rate cuts by mid next year until we see some economic indicators which suggest otherwise. Though owing to the shortened trading in the US this week due to Thanksgiving, the USD may need to wait until next week to if some more meaningful economic gauges can provide some relief (such as Preliminary GDP due on 30^th November).

But for the time being, the current woe of the USD is allowing other currencies to prosper. The euro has made its way back up to the doorstep of the 1.10 level, while the yen has found itself on the southern side of the much-referenced 150 level. It seems that Japanese monetary officials were not too keen on trying to fight rampant US treasury yields to stem yen weakness, so they will likely be breathing a sigh of relief more than most that the steam has finally come out of US bond yields. Particularly given that soaring treasury yields had been exacerbating the depreciation of the yen.

Elsewhere, the AUD is still riding relatively high (despite a moderate fall overnight), courtesy of the current bout of USD weakness and the rather hawkish RBA minutes (released Tuesday) which hinted that a further rate hike could be on the cards in Australia if inflation doesn’t settle down. Australian Q4 2023 and Q1 2024 CPI readings will determine if the RBA does indeed need to pull the trigger again on rates following the hike earlier this month.

In commodities, gold peeked past the US$2k level before slipping back to just shy of this key psychological level. Gold has been among the prime beneficiaries of the USD and bond yields losing their lustre over the past week now that US rate expectations have been scaled back. Essentially, the opportunity cost of holding gold has been reduced now that bond yields have retraced, while the cost of buying the precious metal for foreign investors has also become cheaper due to USD depreciation. Which direction bond yields head next will be the determining factor regarding which side of the $2k level gold will spend the most time residing at in the short-term.

Meanwhile, oil is trading tentatively ahead of the OPEC+ meeting on the weekend. The WTI contract has lifted several dollars off the lows from last week, with speculators anxious that OPEC+ could further tweak output levels in order to induce some upside pressure into the price. During Asian trading hours Wednesday, the WTI contract was seen trading at $77.80 in rangebound conditions.

Looking ahead, unemployment claims, durable goods orders and UoM consumer sentiment readings in the US will be data to watch as markets search for the next directional cues.