Why Did the Federal Reserve Deliver A Hawkish Cut?

Economic

Summary:

Real GDP growth projections were upgraded to 2.5% this year, 2.1% in 2025, and reaches trend growth of 2% by the fourth quarter of 2026.

At its final meeting, the Federal Open Market Committee (FOMC) voted to reduce the Federal funds rate by 0.25% to a target range of 4.25%-4.50%, cutting rates by a 100 basis points (bps) or 300bps annualized in 2024. However, forward guidance via the Summary of Economic Projections (SEP) suggests a shallower path of rate cuts next year. Moreover, the statement tilted hawkish suggesting the Fed will pause cutting at its next meeting and wants the optionality to not have to cut rates at all next year depending on how the data evolves. Altogether, why did the Fed shift hawkishly?

Updates to the SEP argue for less rate cuts next year and suggest arguably a no-landing scenario forecast rather than a soft landing:

Real GDP growth projections were upgraded to 2.5% this year, 2.1% in 2025 and reaches trend growth of 2% by the fourth quarter of 2026. Unemployment rate projections were nudged lower to 4.2% and 4.3% in 2024 and 2025, respectively and remains at 4.3% through 2027.Both headline and core PCE projections were raised to 2.4% and 2.8% in 2024 and to 2.5% in 2025 before normalizing to 2.0% by the fourth quarter of 2027. The committee slashed its median policy rate projections (dot plot) signaling just two rate cuts next year, down from four rate cuts at its September meeting. Long run Fed funds rate projection was also raised to 3.0% from 2.9%.

The impressive resilience of the US economy is clear with growth tracking ~3.0% q/q for the fourth quarter. Moreover, the bounce back in job growth last month suggests a labor market that is cooling but not crumbling. That said, given progress on inflation has slowed recently, Chairman Powell highlighted a renewed concern around inflation, all suggesting more modest easing.

Notably, when asked how tariff policy might impact the committees’ forecast, he pointed to the Fed’s approach in 2018 in which the committee looked through tariffs. However, Powell mentioned a few members did incorporate potential fiscal and tariff policies under the incoming administration in these estimates.

Treasury yields popped, stocks sold off and the dollar spiked as cuts were priced out. For investors, the macro backdrop has not shifted materially, we still expect growth and inflation to normalize, labor to gradually cool and for modest policy easing next year. This should keep earnings growth positive providing support for equities and credit next year, and elevated yields keep income attractive in bond markets. However, in the face of significant policy uncertainty maintaining broad diversification across stocks, bonds and alternatives is the best protection.

FOMC December 2024 Forecasts

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Warren Takunda

Economic

Shares mostly gained in Asia on Monday after U.S. stocks capped a mostly dismal week with a broad rally that still left the benchmark S&P 500 down 2% for the week.

U.S. futures and oil prices advanced.

One shadow over markets was cleared when U.S. lawmakers passed a budget deal in the early hours of Saturday, narrowly averting a pre-Christmas government shutdown.

Tokyo’s Nikkei 225 index jumped 1.3% to 39,201.48, while the dollar was trading at 156.65 Japanese yen, up from 156.48 yen.

Honda Motor Co. and Nissan Motor Corp. were expected to hold a news conference later Monday as reports speculated on a possible merger between Japan’s second and third-largest automakers. Honda’s shares, which fell after news of the talks on a deal surfaced last week, were up 2.3%. Nissan’s, which had soared, rose 0.5%.

Elsewhere in Asia, Hong Kong’s Hang Seng gained 0.7% to 19,857.37, while the Shanghai Composite index slipped 0.1% to 3,363.01.

Australia’s S&P/ASX 500 jumped 1.7% to 8,201.60.

South Korea’s Kospi added 1.5% to 2,441.82 and Taiwan’s Taiex jumped 2.6%, with TSMC, the world’s biggest computer chip maker, gaining 4.4%. Hon Hai Precision Industry, which reportedly has been maneuvering to buy a big stake in Nissan, jumped 3.8%.

In Bangkok, the SET advanced 0.4%.

On Friday, the S&P 500 rallied 1.1%, closing at 5,930.85. The Dow Jones Industrial Average jumped 1.2% to 42,840.26 and the Nasdaq composite gained 1% to 19,572.60.

Roughly nine of every 10 stocks in the S&P 500 rose.

Superstar stock Nvidia and other Big Tech companies led the market, which got a lift after a report said a measure of inflation the Federal Reserve likes to use was slightly lower last month than economists expected. It’s an encouraging signal following recent reports suggesting inflation may be tough to get all the way down to the Fed’s 2% goal from its peak above 9%.

The threat of higher inflation was one of the reasons Fed Chair Jerome Powell gave last week when the central bank hinted it may deliver fewer cuts to interest rates next year than it earlier expected.

That warning sent a shock through the stock market, which had run to 57 all-time highs this year amid the widespread assumption the Fed would deliver a string of cuts to rates into 2025. Now traders are largely betting on one, two or perhaps even zero next year, according to data from CME Group.

Critics had been warning stock prices were vulnerable to drops after running so high and that the market likely needed everything to go correctly to justify its stellar gains for the year. Besides the diminished hopes for several rate cuts next year, Wall Street got another reminder late Thursday that everything may not go as expected.

The U.S. stock market has lost a chunk of its gain since Trump’s win on Election Day, which raised hopes for faster economic growth and more lax regulations that would boost corporate profits. Worries have risen that Trump’s preference for tariffs and other policies could lead to higher inflation, a bigger U.S. government debt and difficulties for global trade.

In other dealings early Monday, U.S. benchmark crude oil picked up 37 cents to $69.83 per barrel.

Brent crude, the international standard, was up 34 cents at $73.28.

The euro rose to $1.0442 from $1.0433.

Source: AP

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Economic

Forex

AUD/USD falls to a two-year low

AUD/USD ended last week at 0.6251 (-1.75%), marking its lowest weekly close in two years - 10% below its high of 0.6942 on 30 September.

Impact of hawkish Fed and MYEFO report

Last week's decline followed the Federal Reserve's (Fed) hawkish interest rate cut, which sent the United States (US) dollar and yields surging, and came after the Australian Federal Government's Mid-Year Economic and Fiscal Outlook (MYEFO) report indicated larger budget deficits over the coming four years.

Raising eyebrows, the MYEFO also included off-budget spending classified as 'investments' for measures such as student debt relief and childcare subsidies, which understates the true size of the budget deficit.

RBA meeting minutes

Date: Tuesday, 24 December at 11.30am AEDT

The minutes from the Reserve Bank of Australia's (RBA) December Board meeting, where the RBA kept rates on hold at 4.35% for a ninth consecutive meeting, are scheduled to be released on Christmas Eve.

The decision was accompanied by a dovish shift in tone in the statement and the press conference. The statement removed language emphasising vigilance toward upside inflation risks and noted the board was 'gaining some confidence that inflation is moving sustainably towards target.'

Economic activity had been weaker than expected. 'National accounts for the September quarter show that the economy grew by only 0.8 per cent over the past year.'

In the press conference, RBA Governor Bullock clarified her previous comments around the need for 'more than one' good inflation print, which could be construed more broadly to encompass a range of data heading into the February meeting.

The meeting minutes will likely sound dovish in line with the statement and will be watched for more details about scenarios in which future financial conditions might need to be less restrictive. Comments on growth, household spending, consumer sentiment, and inflation will draw extra scrutiny.

The Australian rates market starts the new week pricing in a 58% chance of a 25 basis point (bp) cut from the RBA in February, with a first full 25 bp cut priced for April 2025.

AUD/USD technical analysis

In late September, AUD/USD rejected multi-month downtrend resistance at 0.6900 - 0.6910, coming from the 0.8007 high of February 2021 and the 1.1081 high from July 2011.

The sell-off accelerated last week after breaking below multi-month trend line support at approximately 0.6370 - 0.6350.

What Do Australia's Budget Concerns Mean for the AUD/USD?_1

From its late September 0.6942 high to last week's 0.6199 low, AUD/USD has fallen more than 10% over the past 12 weeks.

Last week’s break of the 0.6270 low of October 2023 fell narrowly short of the support coming from the 0.6170 low of October 2022. Should the 0.6170 support level now fall, it would open the way for a test of the psychologically significant 0.6000 level.

A rebound above 0.6350 - 0.6370 would be the first indication that downside risks are easing and that AUD/USD is moving to work off oversold readings. What Do Australia's Budget Concerns Mean for the AUD/USD?_2

What Do Australia's Budget Concerns Mean for the AUD/USD?_2

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Warren Takunda

Economic

The Pound to Euro (GBP/EUR) exchange rate has yet to recover from Thursday's Bank of England policy decision and could be subject to near-term pressure.

The Pound fell sharply after the Bank of England left interest rates unchanged but signalled to markets not to underestimate its intention to continue cutting rates through 2025.

Owing to the Christmas holiday period, the coming week is devoid of market-driving data and events, which could settle proceedings. However, if the underlying momentum continues to extend, a test of 1.20 should be possible.

Beware that holiday-thinned market conditions also make for low liquidity, which can prompt some unusually large moves.

However, we would expect any big moves to be faded amidst mean reversion tendencies.

Pound to Euro Near-term Forecast: 1.20 Possible_1

Ahead of a test of 1.20, we are seeing some buying interest at the horizontal support area at 1.2030; we drew this on the charts last week and said it would be an initial post-Bank of England sell-off target where buying interest can be found.

We already saw such buying interest emerge on Monday, and we wonder if it can provide a near-term floor ahead of any resumption to the 1.20 round level we mentioned.

Although the Bank left interest rates unchanged last week, three of the nine-member Monetary Policy Committee (MPC) voted to cut them, which suggested that the MPC would likely cut again in 2025.

The statement released by the MPC revealed a concern over the slowing economy, which could use the support of lower interest rates.

Bank of England Governor Andrew Bailey said on December 05 that he thinks four rate cuts are appropriate in 2025, and we think the outcome of last week's event would verify that.

The market entered the previous week expecting a mere two full 25 basis points cuts, and the repricing to four cuts could extend into early 2025, putting the Pound under pressure.

However, the Eurozone's fundamental headwinds, including chronically low growth in France and Germany, will limit its weakness. Both countries have seen their economic growth stall and will need to hold new elections in the coming year.

This uncertainty, along with cooling inflation, will allow the European Central Bank (ECB) to 'outcut' the Bank of England, creating the monetary divergence that can underpin Pound-Euro.

Source: Poundsterlinglive

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Cohen

Stocks

Economic

The Korean stock market is expected to continue wallowing in the doldrums until the end of the year due to political and economic uncertainties both at home and abroad.

In contrast to major stock markets like those in the United States, which have shown upward trends, key indicators in the domestic market — including monthly index performance and consecutive months of decline — are expected to reach their worst levels in over two decades.

This has dampened expectations of a so-called “Santa rally,” a phenomenon where stock prices typically experience a bullish trend at the end of the year, which had been more common in the past.

Experts noted that the depreciating Korean won against the U.S. dollar and elevated interest rates continue to be significant burdens on the domestic stock market. They cautioned that the outlook for next year also remains bleak.

However, as most of the negative factors have already been priced in, experts suggested that increasing the proportion of domestic stocks in portfolios is a better strategy than liquidating holdings, pointing to potential bargain hunting opportunities.

According to the Korea Exchange, Monday, the benchmark KOSPI is expected to end with negative monthly returns for nine out of the 12 months this year, excluding February, March and June.

With just four trading days remaining in the year, and the market closing on Dec. 31 for the annual break, the chances of a rebound this month seem slim, largely due to the continued impact of the weak won against the U.S. dollar.

This performance is even worse than during the 1997 Asian financial crisis, when Korea sought a $58 billion bailout from the International Monetary Fund. At that time, the KOSPI posted negative returns for eight months. During the 2008 global financial crisis, the index experienced negative returns for seven months.

If the KOSPI fails to rebound this month, it will mark nine months of negative returns for the first time since the collapse of the dot-com bubble 24 years ago.

“With key monetary policy events in major countries having concluded, there are no indicators or drivers for a rebound, making it difficult to anticipate a year-end rally,” KB Securities analyst Kim Ji-won said.

The underperformance of the domestic stock market is particularly pronounced when compared to the U.S. and Japan.

As of Friday, the KOSPI has fallen 9.42 percent this year, while the Nasdaq in New York surged 30.4 percent. The S&P 500 and the Dow Jones Industrial Average have also risen 24.3 percent and 13.7 percent, respectively.

Japan’s Nikkei index climbed 15.7 percent during the same period.

'Santa Rally' Unlikely In Korean Stock Market This Year_1

U.S. President-elect Donald Trump arrives to speak at Turning Point's annual AmericaFest 2024 in Arizona, Sunday. AFP-Yonhap

Analysts underscored that an upward trend in the domestic stock market cannot be guaranteed even in the first quarter of next year. Factors such as the inauguration of Donald Trump as U.S. president in January, his anticipated high-tariff policies, and ongoing domestic political uncertainties surrounding the impeachment crisis of President Yoon Suk Yeol are expected to weigh on the Korean financial markets.

"The Korean stock market is currently in a phase burdened by high interest rates, high exchange rates, political and policy uncertainties in the U.S. and a slump in the semiconductor industry,” NH Investment & Securities analyst Kim Young-hwan said.

SK Securities analyst Jo Joon-ki noted that for the KOSPI to maintain a consistent upward trend, a prolonged period of declining interest rates and a strengthening won are essential.

But he added that the current market conditions present bargain hunting opportunities.

“Given the much more favorable risk-reward ratio, this is a good time to increase positions rather than sell off and flee, especially for investors with a longer investment horizon,” he said.

On Monday, the KOSPI closed up 37.86 points, or 1.57 percent, from the previous session, finishing at 2,442.01.

Source: Koreatimes

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Alex

Economic

(Dec 23): Chinese automakers captured their smallest share of Europe’s electric-vehicle (EV) market in eight months, after new tariffs added as much as 35% to the cost of importing cars to the region.

Manufacturers such as BYD Co and SAIC Motor Corp’s MG accounted for 7.4% of EV registrations across the European Union (EU) in November, down from 8.2% in October, according to automotive researcher Dataforce. That’s the lowest level since March.

The EU imposed the added tariffs at the end of October, after an investigation found that state aid had provided China’s EV industry with an unfair advantage. Months of talks failed to resolve the trade dispute, leading Brussels to tack the new fees onto an existing 10% import duty.

While all EVs produced in China are subject to the tariffs, including ones made by Western brands like BMW AG and Tesla Inc, the amounts vary depending on how much support an automaker received and whether it cooperated with the EU’s probe.

MG’s state-owned parent SAIC was hit hardest, with tariffs that now total 45%. Long the top-selling Chinese carmaker in Europe, the once-British sports car brand has faltered recently, logging a 58% drop in registrations last month from a year earlier, based on data provided by Jato Dynamics, another research firm.

Amid MG’s retreat, BYD has pressed ahead, with registrations across Europe more than doubling in November to 4,796 vehicles.

“BYD is taking over the market while MG is taking major setbacks,” said Julian Litzinger, an analyst with Dataforce. BYD’s growth is healthy, he added, with nearly 80% of its registrations attributed to private and fleet customers.

Chinese carmakers, eager to expand to major global markets, have hit resistance in Europe after being effectively shut out from the US.

Lower battery costs have given Chinese firms a price advantage, but the issue has stirred protectionist impulses as officials in the US and EU work to shield local automakers. The industry, which employs hundreds of thousands of workers in Germany, France and Italy, is struggling with the transition away from combustion-powered cars.

While the EU tariffs have blunted China’s push in the region, their introduction generally led to a smaller-than-expected setback, Litzinger said.

In Germany and France, however, EV registrations by Chinese manufacturers more than halved in November from a year earlier, he said. By contrast, Chinese EV makers posted a 17% year-on-year gain in the UK, which isn’t a member of the EU and hasn’t adopted the tariffs.

The shift towards EVs, once seen as inevitable, has slowed in 2024 in many global markets and become more unpredictable, leading automakers to reassess their strategies from model lineups to plant locations and even corporate structures.

Chinese automakers are taking steps to localise production in Europe, but those efforts will take time to mature.

Globally, car companies are looking for ways to share costs as they try to keep up on expensive technological change. Last week, it emerged that struggling Nissan Motor Co was exploring a tie-up with fellow Japanese manufacturer Honda Motor Co, partly to strengthen their ability to compete in EVs.

Source: Theedgemarkets

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Owen Li

Economic

Energy

PUTRAJAYA (Dec 23): The rebate for the installation of solar systems, up to RM4,000, under the Solar for Rakyat Incentive Scheme (SolaRIS), will be extended until April 30, 2025, the Ministry of Energy Transition and Water Transformation (Petra) announced in a statement on Monday.

This extension is subject to the terms and conditions specified in the SolaRIS eligibility criteria.

PETRA also added that details regarding the SolaRIS programme can be found on the Tenaga Nasional Bhd (TNB) website at www.tnb.com.my.

In the statement, Petra also announced improvements to the guidelines for the implementation of the rooftop solar system installation programme under the Net Energy Metering (NEM) programme.

The improvements will allow existing users to increase the capacity of their solar systems and transition to the current NEM programme in line with the latest terms and guidelines.

According to Petra the NEM programme will now also be open to agricultural electricity users, allowing them to benefit from the installation of photovoltaic (PV) solar systems and support initiatives aimed at enhancing national food security.

Additionally, Petra revealed that the quota for the NEM Rakyat category will be increased by 150 megawatts (MW) to a total of 600MW. This increase will enable more domestic users to utillise rooftop space for the installation of PV solar systems.

Moreover, the quota for the NEM NOVA category, which caters to commercial and industrial users, will be increased by 300MW to a total of 1,700MW.

This expansion aims to support corporate entities in fulfilling their Environmental, Social, and Governance (ESG) commitments, as well as benefit agricultural users.

Petra confirmed that all quotas under the NEM programme are now open for applications from interested consumers until June 30, 2025, or until the quotas are fully allocated, whichever occurs first.

The updated guidelines for both the NEM Rakyat and NEM NOVA programmes can be accessed on the Energy Commission’s website at www.st.gov.my, while additional details on the NEM programme are available on the Sustainable Energy Development Authority (SEDA) website at www.seda.gov.my

Petra also said that the improvements to the NEM programme implementation and the extension of the SolaRIS scheme will take effect from Jan 1, 2025.

The ministry reaffirmed its commitment to the nationwide implementation of renewable energy initiatives, including the rooftop solar installation programme, to support the country’s energy transition.

The goal is to achieve a 70% share of renewable energy capacity in the national electricity supply by 2050.