Stock markets may be taking a breather as the minutes of the November FOMC meeting reiterated that the Federal Reserve will probably raise interest rates. The US dollar may fall further.
- Minutes from the November FOMC meeting focused on the slow holiday week.
- A familiar tone seems likely, indicating that the rate hike cycle is probably over.
- Stocks may rise while the US dollar may fall as stimulus expectations calm traders.
The minutes of this month’s ill-fated meeting of the Federal Open Market Committee (FOMC), the policy-conducting body of the US central bank, stand out as an inflection point in an otherwise bare week for financial markets. These minutes could offer a fond farewell to US markets as they close for the Thanksgiving holiday in the middle of the week.
Traders applauded the results of the November conference call, reading the message from officials to mean that – with all reasonable disclaimers – the interest rate hike cycle is probably over. It ended a saga that began with September’s FOMC meeting, where Fed Chair Jerome Powell and company tactfully talked their way into tightening markets.
Fed communication strategy: Dovish without rate hikes
Investors walked away from the gathering worried about the Fed’s threat to keep interest rates “high for a long time.” Its updated set of economic forecasts calls for growth in 2024 to be 50 basis points (bps) higher than previously expected. Stocks fell and long-term bond yields rose as a rise in bond premiums pointed to building uncertainty.
Source: Bloomberg
By mid-October, Powell indicated in a speech at the Economic Club of New York that rising yields had done enough to strengthen financial conditions without another hike. This was followed by a wave of dovish comments from other central bank officials. The stage seemed set for confirmation in November, and the market seemed confident that it had arrived.
Wall Street rejoiced. The bellwether S&P 500 index is on pace for its best month since July 2022. The yield on 10-year Treasury bonds is down more than 10%, the biggest decline since March 2023, when the Silicon Valley Bank-led banking crisis gripped financial markets. , The US dollar is down 3.2%, the most in a year.
Now, the policy path pricing in Fed funds futures suggests that the likelihood of further tightening this cycle has evaporated. The first 25 bps rate cut is due to appear after June. The probability of an earlier drawdown in May is a whopping 71.4%. There will be three 25 bps price cuts by the end of 2024, with a 60% chance of a fourth cut.
November FOMC Minutes: Whispering Sweet Words
As liquidity begins to dry up before US markets close, the FOMC minutes document reiterates that the cost of capital has probably stopped rising, which may bring relief to investors. Potential tensions such as wars in the Middle East and Europe and corporate chaos at the high-flying tech sector’s darling OpenAI may seem more digestible when the future sees capital becoming cheaper rather than more expensive.
Source: Bloomberg
With this in mind, the FOMC minutes need to break new ground for policy approach. A status quo message in line with the path already expected by investors could take a sigh of relief from the market, sending stocks higher while the greenback retreats as participation levels decline.
Ilya Spivak, TastyLive’s Head of Global Macro has over 15 years of experience in trading strategy, and is adept at identifying thematic moves in currencies, commodities, interest rates and equities. he hosts macro money and co-host for a longer time, Monday Thursday. @IlyaSpivak
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