Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Financial markets witnessed a substantial risk-on rally Wednesday after the US Federal Reserve delivered an early Christmas present to the market after signalling that the next move in interest rates is down. This resulted in a substantial rally in Treasuries, particularly in the short end, with the 2-year yield dropping 36bps to 4.36% and the 10-year yield dropping below 4% while the Dow Jones reached an all-time high. Simultaneously, the dollar experienced a significant decline with gold surging back above $2030. Focus today on the Bank of England and ECB meetings.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Stocks rallied on a dovish FOMC and Powell. The Dow Jones Industrial Average surged 1.4% to 37,090, reaching an all-time high. The S&P500 gained 1.4% to 4,707, and the Nasdaq 100 added 1.3% to 16,562. The momentum is likely to continue through December, with the S&P500 approaching 5,000. Investors are likely to conclude that the Fed will cut rates more and faster than previously priced in. In extended hours, Adobe sank 5.4% after the software giant provided a downbeat sales outlook for 2024, as it will take time for generative AI products to generate revenues.
FX: The dollar plummeted as Treasury yields fell sharply after the FOMC. The DXY plunged 0.9% as the dollar dropped against all G-10 currencies. AUD and JPY gained around 1.7%, with AUDUSD at 0.6665 and USDJPY at 142.85. GBP underperformed due to weaker-than-expected GDP prints, gaining only 0.5% against the dollar, trading at 1.2620.
Commodities: Gold trades up 2.8% to $2035 and silver 5% to $23.90 following the FOMC pivot towards lower rates which drove a metal and commodities in general supportive slump in Treasury yields and a weaker dollar. Traders are once again pricing in five 25 bps cuts next year and it helped reverse part of the recent gold correction that followed the early December premature surge and subsequent slump. WTI crude and Brent crude surged around 1.4% to $69.5 and $74.3 respectively, supported by the improvement in broad risk sentiment and the risk of short covering following weeks of selling.
Fixed income: Following a dovish FOMC statement and remarks from Fed Chair Powell that effectively signaled potential rate cuts, Treasuries experienced a significant rally. The short end performed well, with the 2-year yield dropping 30bps to 4.43%, while the 10-year yield decreased by 18bps to 4.02%. The yield curve is poised to bull-steepen further favoring an extension of duration across tenors. We reiterate our prediction that the Fed will initiate rate cuts in Q1 2024, and we anticipate further gains in the Treasury market.
Macro: The Fed’s FOMC, as expected, held rates unchanged. The FOMC statement added the word “any” in front of its description of “additional policy firming”. In the press conference, Chair Powell said that the FOMC added “any” as an acknowledgement that the Fed “is likely at or near the peak rate for this cycle”, and “very focussed” on not making the mistake of keeping rates restrictive for too long. In the Summary of Economic Projections, the Fed removed the one rate hike previously projected and increased the number of rate cuts for 2024 to three, projecting the Fed Fund target falling 75bps to 4.50-4.75% (vs previous projection of 5.0-5.25%) by the end of 2024. Further, the FOMC’s projections, or dot plots, suggest 100bp cuts in 2025 to 3.50-3.75% (vs the previous projection of 3.75-4.0%), and 75bp cuts in 2026 to 2.75-3.0% (same as in the previous projection) by the end of 2026. US Core PPI came in softer than expectations in November, remaining unchanged month-on-month in November (vs consensus +0.2%), and slowing to 2.0% Y/Y from 2.4% in October and below the consensus forecast of 2.2%. The headline PPI came in at 0.0% M/M and 0.9% Y/Y, broadly in line with expectations. The softness in the PCE-relevant component in the PPI report tends to support the market projection of November core PCE to fall to 3.4%. UK GDP contracted 0.3% M/M in October, worse than the -0.1% expected and down from the prior month’s +0.2%.
Technical analysis highlights: S&P 500 no resist until 4,818. Nasdaq 100 uptrend eyeing 16.750, support at 15,744. DAX uptrend very stretched but likely to be testing 17K. EURUSD resistance at 1.0825 broken, bounced to 0.618 retracement at 1.09, potential to 1.10. USDJPY spiked below support at 141.54. EURJPY downtrend support at 155.52. GBPUSD resumed uptrend resistance at 1.2745. Gold bounced from 1,975, likely move to 2,070. WTI Crude oil support at 67. Brent support at 71.93. 10-year T-yields below 4% support at 3.84
In the news: Tesla recalls nearly all vehicles on US roads over lack of Autopilot safeguards (Reuters), Adobe Signals That AI Boost Will Take Longer Than Expected (Bloomberg), Fed Begins Pivot Toward Lowering Rates as Inflation Declines (WSJ)
Macro events (all times are GMT): Bank of England (1100), ECB (1215), US Retail Sales (Nov) exp –0.1% vs –0.1%, EIAs Natural Gas Storage Change (1430).
Earnings events: Costco, Lennar
For all macro, earnings, and dividend events check Saxo’s calendar