Fed Pours Cold Water on March Cut, Bank of England up Next

Economic

Forex

Summary:

Like the Fed last night, the main debate now remains on when we start to see rate cuts and not if...

European markets finished the month on a down note with the FTSE100 posting its worst month since October last year, with a decline in US markets acting as an anchor on the wider market.

While the FTSE100 had a disappointing month, the CAC 40 and DAX managed to start 2024 with some modest gains as well as managing to achieve new record highs during the month.

US markets also ended what was a strong month very much on a downswing, with the S&P500 posting its biggest one day fall since September, after the Federal Reserve kept rates unchanged, but in the statement came out less dovish than had been expected, with Fed chair Jay Powell leaning against the idea of a March rate cut during the ensuing press conference.

As far as the statement was concerned, the reference to possible additional rate hikes was removed, while in its guidance the central bank stated that it does not expect it will be appropriate to cut rates until there is greater confidence inflation is moving sustainably towards 2%.

The tone of this line in the guidance leant very much against the prospect of a March rate cut, a line that Powell kept very close to.

It was notable that the accompanying statement maintained that job gains have remained strong despite having slowed, and that inflation remains elevated.

At the press conference Powell faced a varying number of questions but the one that moved the markets the most was when he said that he thought a March rate cut was unlikely, and not the Fed's base case, which pulled yields off the lows of the day, and sent stocks to the lows of the day.

Having seen the Fed pour cold water on market expectations of a March rate cut last night, today we get the latest from the Bank of England, where the rate of UK inflation is slightly more elevated, although is still slowing sharply.

When the MPC took the decision to hold rates steady in September it was a close-run thing, but on the balance of risks it was the right one given the challenges facing the economy as we head into year end, and which were borne out by the -3.2% decline seen in December retail sales at the end of last year.

At the December meeting there was a 6-3 split on rates with the 3 external members of Catherine Mann, Megan Greene, and Jonathan Haskel all voting for another 25bps rate hike due to concerns over higher levels of domestically driven inflationary pressures.

Their caution was understandable given the high levels of services inflation which slowed to 6.1% in December and wages growth which slowed to 6.6% in the 3-months to November.

In the aftermath of the December hold and the deterioration in some of the recent economic numbers there had been some expectation that the Bank of England might cut sooner rather than later, however the recent rhetoric from the likes of Governor Andrew Bailey suggests that isn't the case.

The December uplift in UK inflation to 4% serves to highlight the challenges facing the Bank of England in returning inflation to its 2% target and show that the process is unlikely to be linear.

No changes are expected to monetary policy today with the main question being around whether our resident hawks decide to vote with the majority for no change and temper their hawkishness. Of the 19 meetings Catherine Mann has voted in she has voted to increase the base rate at 17 of them so a hold will be a rare event for her.

There is also the possibility of a dovish outlier with the potential for Swathi Dhingra voting for a rate cut, prompting a split in the opposite direction to what we saw in December.

Since joining the MPC Dhingra has only voted to raise rates twice in the 11 meetings she has voted in, so if anyone is going to break ranks and starting voting to cut rates it will be her.

Like the Fed last night, the main debate now remains on when we start to see rate cuts and not if.

The timing of when to expect the first rate cut is also a live one at the European Central Bank, with Bundesbank President Joachim Nagel softening his tone with respect to his hawkishness around inflation, the timing of which was particularly timely given yesterday's awful German economic numbers on retail sales and import prices. Today's EU flash CPI numbers for January are expected to see a modest slowdown from the jump to 2.9% to 2.7% with the month-on-month number set to fall by -0.8%. Core prices are expected to slow to 3.2%.

We're also set to see the latest manufacturing PMIs confirmed at the weak readings we saw in the flash numbers for France and Germany at 43.2 and 45.4 respectively.

On the data front US weekly jobless claims are expected to come in at 212k.

EUR/USD – currently flitting between the 1.0800 and 1.0900, but still finding solid support in and around the 1.0790/1.0800 area, raising the prospect that we could see a move towards the 1.0720 area. Resistance at the highs last week at 1.0930 and behind that at 1.1000.

GBP/USD – the 50-day SMA continues to support the downside with support further down at the 1.2590 area. We need to get above 1.2800 to maintain upside momentum and target the 1.3000 area.

EUR/GBP – still finding solid support above the 0.8500 area, while finding selling interest at the 0.8570/80 area. While below this resistance the risk remains for a move towards 0.8470. Above 0.8580 potentially targets the 0.8620 area.

USD/JPY – slipped below the lows of last week at 146.65 area, opening the possibility of a move towards the 50-day SMA at 145.80. Resistance remains back at the January highs at 148.80, as well as the highs this week at 148.20.

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Commodity

U.S. wheat futures fell on Wednesday on technical selling and spillover weakness from European wheat markets amid thin export demand, while corn and soybeans stabilized after setting multi-year lows a day earlier.

Chicago Board of Trade (CBOT) March wheat settled down 10-1/4 cents at $5.95-1/4 per bushel but stayed inside the previous day's trading range.

CBOT March corn closed up 1/2 cent at $4.48-1/4 a bushel and March soybeans finished up 3-1/2 cents at $12.22-1/4 a bushel.

For the month of January, CBOT corn fell 4.9% and soybeans fell 5.8%, reflecting improved crop prospects in South America. CBOT wheat ended the month down 5.2%, pressured by weak export demand and improved moisture in the U.S. Plains.

Grain traders were cautious on Wednesday amid an absence of market-moving ag news and ahead of the Federal Reserve's first monetary policy decision of the year. Wall Street equities fell sharply after the Fed left interest rates unchanged as expected, but gave no hint that a rate cut was imminent.

"Fresh news is largely lacking today, leaving traders to focus on their risk exposure. For now, that means general weakness, although we've seen some markets drift higher," StoneX chief commodities economist Arlan Suderman said in a client note.

CBOT wheat fell as Euronext wheat futures hit contract lows, pressured by sluggish export demand and stiff competition from Russian supplies. Looking ahead, Russia will increase the area for the 2024 harvest by 300,000 hectares to 84.5 million hectares, the country's agriculture minister said.

Crude oil sagged after data showed China's manufacturing activity contracted for a fourth straight month in January, raising concerns about the health of the world's No. 2 economy and top global soy buyer.

Uncertainty over Chinese imports has added to price pressure from favourable harvest prospects in South America, which competes with the United States in export markets.

Rabobank said "yield-boosting South American rainfall (for corn and soy), Chinese demand headwinds and a good production outlook for U.S. and Russian wheat" were weighing on prices.

Source：Reuters

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Alex

Cryptocurrency

Analyst and trader who works with cryptocurrency markets, Michael van de Poppe, has issued a social media post, suggesting that the recent approval of Bitcoin exchange-traded funds may propelling the Bitcoin price much higher than everybody expects.

He also shared key reasons why Ethereum is likely to reach new momentum within the upcoming few weeks.

Spot Bitcoin ETF impact on BTC, per Poppe

Michael van de Poppe believes that the markets at the moment should be cautious regarding the impact of the spot-based Bitcoin ETF, which has not come into its own yet. The expert admits that there is “some selling pressure in the short term.”

However, as for the long term, he reckons that then a tremendous amount of new cash flows will start going into the Bitcoin market from fresh participants. When this happens, he adds, Bitcoin may soar much higher in the current cycle than everybody thinks it will.

Famous crypto YouTuber Lark Davis seems to agree with van de Poppe. In a recent tweet, the cryptocurrency blogger called on his followers not to be afraid of the Bitcoin plunge taking place at the moment. He assumed that should anyone “look behind the scene, ” it would become clear that the top market players are taking advantage of this Bitcoin price dip – major financial institutions, nation-states and companies are taking this chance to accumulate Bitcoin cheaper than before.

Lark ended his tweet, stating: “This is the dip that you wanted 3 weeks ago.”

3 key reasons for future Ethereum momentum, per Michael van de Poppe

The analyst also published a tweet to express his view on the future Ethereum momentum. He believes that three main reasons now support the likelihood that momentum may return to the second-largest cryptocurrency within the next several weeks.

The first reason is that Bitcoin is now bottoming out, and this is usually a big trigger for altcoins to start on a new bull run. The second one is the hype about spot Ethereum ETFs soon getting stronger. And the final reason is that Ethereum is soon to roll out new upgrades, which are expected to bring down transactional costs on this blockchain by a whopping 90%.

Source：U TODAY

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Owen Li

Energy

Asia's imports of crude oil saw robust growth in the new year, reaching an eight-month high in January as top buyers China and India snapped up cargoes.

The world's top-importing region saw arrivals of 28.57 million barrels per day (bpd) in January, up from 27.03 million bpd in December, according to data compiled by LSEG Oil Research.

China, the world's biggest crude buyer, imported 11.31 million bpd in January, slightly below the 11.48 million bpd in December, but well above the 10.24 million bpd from the same month in 2023, according to LSEG.

It's likely that China's refiners were encouraged to keep imports at robust levels given the lower oil prices prevailing when cargoes were arranged and the release of most of their annual import quotas in one tranche at the start of 2024, rather than the usual practice of several instalments.

China's imports from Russia via pipeline and tankers were 1.94 million bpd in January, making it the biggest supplier of crude, edging out Saudi Arabia's 1.68 million bpd.

However, it's worth noting that arrivals from Saudi Arabia were up from December's 1.38 million bpd, which suggests that the world's biggest exporter is making an effort to regain market share in China.

It's likely that China's imports from Saudi Arabia will rise further in February after the kingdom cut its official selling prices (OSP) for its flagship Arab Light crude for February-loading cargoes to the lowest in 27 months.

It's not just China buying more Saudi oil, with Asia's imports rising to 5.63 million bpd in January, up from 5.46 million in December.

India, which had turned away from Saudi crude in favour of discounted barrels from Russia, is said by trade sources to be seeking more cargoes from Saudi Arabia in February.

India High

India, Asia's second-biggest importer, is on track for record imports in January, with LSEG tracking arrivals of 5.33 million bpd, up from 4.65 million bpd in December.

Russia remains India's top supplier with 1.43 million bpd in January, up from 1.34 million in December, with Iraq in second place at 1.34 million bpd, up from 1.10 million bpd in December.

With India's economy performing strongly and rising profit margins for refined fuels in Asian markets, the country's refiners are likely to continue to demand high crude volumes to take advantage of robust domestic and export markets for fuels.

The question for the market is whether Asia's strong start to the year for crude imports is likely to sustain.

It's likely that February will also see robust imports, largely because cargoes arriving this month will have been purchased when crude prices were soft.

Global benchmark Brent futures hit a 5-1/2 month low of $72.29 a barrel on Dec. 13, having been trending lower after hitting the 2023 high of $97.69 in late September.

This means that cargoes arriving in February were likely arranged when crude prices were declining.

However, Brent started rallying from mid-December onwards, and a pullback in January amid global demand concerns was reversed in recent weeks as fears mounted over shipping disruptions through the Red Sea caused by missile and drone attacks by Yemen's Iran-aligned Houthi group.

Brent reached a high so far this year of $84.80 a barrel on Jan. 29, and ended at $81.71 on Wednesday.

Higher prices may crimp some import demand in China, which can turn to inventories if it wants to keep refinery processing steady.

India is also a price-sensitive buyer, but it's likely to take several months of stronger oil prices to slow domestic demand enough to prompt lower imports.

Overall, Asia's strong start to 2024 for crude imports likely will extend for the rest of the first quarter, but what happens beyond that will largely depend on the trajectory of oil prices.

Source: Reuters

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FastBull Featured

Remarks of Officials

The Federal Reserve left interest rates unchanged in its January policy meeting on January 31, and the monetary policy statement showed that:

Inflation remains too high. Sustained progress in reducing inflation is not guaranteed, and the road ahead is uncertain. As labor market tightness has eased and progress on inflation has continued, the risks to achieving our employment and inflation goals are moving into better balance.

Recent indicators suggest that economic activity has been expanding at a solid pace. The labor market remains tight, but supply and demand conditions continue to move into better balance. Nominal wage growth has slowed and job openings have declined. Although the jobs-to-workers gap has narrowed, labor demand still exceeds the supply of available workers.

Policy rates have likely reached their peak in the current tightening cycle. If economic developments are broadly in line with expectations, it would be appropriate to start cutting rates at some point this year. The economic outlook remains uncertain, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.

The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%. We will continue to make our decisions meeting by meeting.

The policy statement, while brief, has changed significantly from the previous one:

First, there was a change in the description of the economy, from "economic activity grew at a slower pace than the strong growth seen in the third quarter" in December to "economic activity has been expanding at a solid pace," indicating increased confidence in the economy (implying more confidence in a soft landing).

Second, the previous description of financial conditions that "the U.S. banking system is strong and resilient. Tighter financial and credit conditions for households and businesses could have a negative impact on economic activity, hiring, and inflation" was deleted.

Third, it added that "the Committee believes that the risks to achieving its employment and inflation goals are moving into better balance, and the economic outlook is uncertain".

Finally, there was a change to the future policy guidance, with the deletion of the words "the Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy tightening that may be appropriate to return inflation to 2% over time, the Committee will consider the cumulative tightening of monetary policy, the time lag over which monetary policy affects economic activity and inflation, and economic and financial developments" (i.e., words suggesting further future rate increases have been deleted). Those were replaced by "In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess the incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%".

The notable changes in the statement at this meeting indicate an adjustment of the Fed's monetary policy stance, basically signaling the end of the current rate-hiking cycle. But the end of the rate hike does not mean the beginning of the rate cut. The timing of interest rate cuts is still uncertain. This meeting also made clear a signal that the matter will be "when" rather than "whether" to cut rates.

Words at this meeting are more neutral compared to the "further tightening of policy" or rising rate outlook insisted on by the Fed since the last rate hike six months ago.

The Fed also hinted at the meeting that it will cut rates but does not want the market to expect a too-early cut.

Monetary Policy Statement

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Alex

Commodity

OPEC oil output in January registered the biggest monthly drop since July, a Reuters survey found, as several members implemented new voluntary production cuts agreed with the wider OPEC+ alliance and unrest curbed Libyan output.

The Organization of the Petroleum Exporting Countries pumped 26.33 million barrels per day (bpd) this month, down 410,000 bpd from December, the survey found. December's total strips out Angola, which has left OPEC.

The latest decline marks a further drop in market share for OPEC, which began curbing output in late 2022, in order to support the market and counter increased output from non-OPEC countries such as Brazil and the United States.

In January, the biggest decline came from Libya, one of the OPEC members not required to restrain output, after unrest prompted the shutdown of the Sharara oilfield, one of the country's largest.

Some OPEC members pledged voluntary cuts in two rounds - in April 2023 and November 2023, and Saudi Arabia made an additional voluntary cut. Output in January was 214,000 bpd above the implied OPEC target, largely because of Iraq, Nigeria and Gabon pumping more than their targets, the survey found.

Iraq and Kuwait each cut output by 140,000 bpd as part of the new round of voluntary cuts, although Iraqi output remains 141,000 bpd above the country's self-declared target for the first quarter, the survey found.

The next-largest cut came from Iran, also exempt from quotas, which lowered exports, the survey found. Iran is still pumping near a five-year high reached in November after posting one of OPEC's biggest output increases in 2023 despite U.S. sanctions still being in place.

Algeria cut output by 40,000 bpd, implementing most of its voluntary reductions.

Among those with higher output, Saudi production edged up by 40,000 bpd although it was close to its target of around 9 million bpd. The top exporter extended a voluntary 1 million bpd cut into the first quarter as part of November's OPEC+ deal.

Nigeria raised output by 40,000 bpd, the survey found, as some crude was processed in the new Dangote refinery and exports held largely steady, the survey found. Output was 40,000 bpd above the country's 2024 target.

Source: Reuters

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WELLS FARGO

Economic

Central Bank

FOMC Removes “Bias” to Tighten Further

As universally expected, the voting members of the Federal Open Market Committee (FOMC) decided unanimously at their meeting today to make no changes to the Fed’s policy stance. After hiking rates by 525 bps between March 2022 and July 2023, the Committee has subsequently maintained its target range for the federal funds rate at 5.25%–5.50% (Figure 1). FOMC Removes "Bias" To Tighten, but Don't Expect Imminent Easing_1

FOMC Removes "Bias" To Tighten, but Don't Expect Imminent Easing_1

In an important development, the Committee removed its implicit “bias” to tighten policy further in its post-meeting statement. That is, the statements that were released last autumn noted that the Committee would take into account a range of information when “determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time.” This sentence was tweaked in December to state “in determining the extent of any (emphasis ours) additional policy firming that may be appropriate…” Today’s statement noted that “the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks” when “considering any adjustment to the target range for the federal funds rate.” Until today, the FOMC statement was signaling that it was more likely that rates would need to rise further in the near term than to decline. The language in today’s statement signals a more balanced approach towards the next move for the fed funds rate. In the post-meeting press conference, however, Powell stated that “we believe that our policy rate is likely at its peak for this tightening cycle.”

But the Committee Needs “Greater Confidence” Inflation is Moving to 2%

But we are not convinced the conditions will yet be in place to induce the FOMC to cut rates as soon as its March 20 meeting. Today’s statement also noted that “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” As shown in Figure 2, the year-over-year change in core PCE inflation, which Fed officials believe is the best measure of the underlying rate of consumer price inflation, printed at 2.9% in December, which is still meaningfully above the Committee’s target of 2%. Although the core PCE deflator has risen at an annualized rate of only 1.5% over the past few months, it would be premature, in our view, to confidently claim that the economy is now out of the inflation woods. The FOMC will get only one more reading on PCE inflation before its next policy meeting on March 20. We are not entirely convinced that just one more data point will give the FOMC “greater confidence” that inflation is moving back toward 2% on a sustainable basis. FOMC Removes "Bias" To Tighten, but Don't Expect Imminent Easing_2

FOMC Removes "Bias" To Tighten, but Don't Expect Imminent Easing_2

We Look for First Rate Cut in May

As we discussed in our most recent U.S. Economic Outlook, we look for the FOMC to cut rates by 25 bps at its meeting on May 1. Despite today’s statement that many market participants initially viewed as mildly “hawkish” – bond yields moved a few basis points higher in the immediate aftermath of the news – we maintain our view of a 25 bps rate cut on May 1. The FOMC will receive three more PCE prints between now and May 1. The 1.5% annualized rate of change in the core PCE deflator over the past three months indicates that the year-over-year rate of core PCE inflation will recede further in coming months. Moreover, we look for monthly changes in the core PCE deflator to remain benign in the foreseeable future. In our view, the FOMC will feel confident three months from now that inflation is moving back toward 2% on a sustained basis. A rate cut in March is not out of the question, but we would probably need to see a small increase in January core PCE prices, due at the end of February, in conjunction with soft data on economic activity, to compel the Committee to move in March.

We look for the FOMC to continue to cut rates after May. Specifically, we forecast that the Committee will reduce its target for the federal funds rate by 25 bps at each of the policy meetings on June 12, July 31 and September 18. As we noted in our most recent U.S. Economic Outlook, the decline in inflation that we anticipate in coming months will cause the real fed funds rate to rise further if the FOMC keeps its target range for the nominal fed funds rate unchanged. In other words, the real stance of monetary policy will tighten further if the FOMC stands pat. The Committee will need to reduce the target range in coming months just to keep the real stance of monetary policy unchanged. We currently forecast that the Committee will take a breather at its November 7 meeting, before ending the year with one more 25 bps cut on December 18. In sum, we forecast the FOMC will cut rates by 125 bps by the end of 2024. Stay tuned.

To stay updated on all economic events of today, please check out our Economic calendar

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