FOMC minutes in Review

The equity market continued its second consecutive day of decline as the latest job data and release of FOMC minutes failed to inspire risk-on sentiments. 

💰Uncertain monetary outlook.💰

While Uncle Powell’s prior press conference after the interest rate decision was seen as dovish, the FOMC minutes are slightly more hawkish than one could expect. Most members believed that the interest rate cycle is likely at the peak or near the peak for the tightening cycle, but more remains to be seen in the coming month’s economic data. 

Nearly all of the officials have indicated a lower federal funds rate going into 2024, although some members felt that there is some uncertainty and, thus, further rate hikes should not be considered. 

💸March rate cut unlikely.💸

This reflects a milky outlook and dampens the prospects of a March rate cut, which has been the primary driver of the bull market since November 2023. Futures are now pricing around 65% of a March cut lower than the 74% a week ago. 

The minutes acknowledge the progress made in taming inflation after the 11 rate hikes implemented since March 2022 and that it could further reduce consumer spending and cool the labour market, helping the Fed to achieve its 2% target in the medium term. 

This expectation also confirms the tightened financial conditions households and businesses face that can churn economic activity, dampening hiring and, eventually, inflation. Yet, some degree of “uncertainty” is still noted. 

Given that inflation is still well above the Fed’s 2% goal, we are mindful of a re-calibration of expectations that could cause a tectonic shift in the equity market. This makes our still large positions uncomfortable. Our trading and main account are likely to register a double-digit negative return for January as we see heightened volatility with the VIX aiming to break its near-term resistance. 

📪What’s on the menu today? 📖

At 9.15 pm, we will have the ADP Nonfarm Employment Change and Initial Jobless Claims at 9.30 pm, which will help us understand the labour market strength. 

The S&P Global Services PMI for Dec is expected to increase from 50.8 to 51.3. 

It is 4 Jan 2024, Thursday, 8.55 am in Singapore and 8.55 pm in New York. With the pullback seen in the market, we are mindful of new positions as our losses are mounting fast and will likely take further losses to cushion our capital as the market re-adjusts its expectations after a more hawkish FOMC minutes. 

We hope you have a profitable trading week ahead.