The Great Pivot of 2023, What the Fed Said, Signaled and Projects, Plotting 2024
What the Fed has done, quite overtly, is make clear that they want no part of an election year recession.
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Monetary policy has not eased just yet. That said, monetary conditions sure have, even since Wednesday afternoon.
What the FOMC has done, quite overtly, was make clear to investors and to the general public that they want no part of an election-year recession. Over the course of six weeks (since November 1), various members of the FOMC, who had been hawkish in posture (such as Fed Gov. Chris Waller), had shifted that posture quite publicly, and quite intentionally. This set up the events of Wednesday afternoon.
This was the day that the Fed had engineered, without taking action, and enough optionality to posture itself as dovish heading into the new year. To say that financial markets, which had front-run this pivot for weeks, welcomed the change, would be an understatement.
The yield for the U.S. 2-Year Note fell some 30 basis points to 4.43% by day's end. As we pass the zero dark hours on Thursday morning, that yield has dropped even further to 4.31%. The U.S. 10-Year Note paid just 4.02% late Wednesday, down 19 basis points. This morning, I've seen the 10-Year yield at 3.94%. Even 6-Month T-Bills are yielding roughly 5 fewer basis points this morning than they were less than 24 hours ago.
This all occurred as the U.S. Dollar Index fell from approximately 103.9 at the time of the FOMC release all the way to 102.56 at last glance. Both the European Central Bank and the Bank of England step to the plate with policy decisions on Thursday morning.
Party on, dudes!
The Fed Statement
Most of the changes in what was mostly a "cut and paste" official policy statement came in the first paragraph of the text. First, the Fed described economic activity as having " slowed from its strong pace in the third quarter." This replaced activity that went from "moderate" to "solid" to "strong" over the previous three statements. See what the Fed did there. While posture was hawkish, the statement describes economic activity as a bit stronger in each statement from the statement just ahead in chronological order. Before publicly pivoting on Wednesday, this statement then downgrades economic activity.
As the first paragraph closes, inflation is downgraded from remaining "elevated" on and prior to November 1 to having " eased over the past year" on December 13.
Finally, down in the third paragraph, the word " any" was inserted into the sentence that now reads... "In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time..." This softens the meaning of this sentence, potentially implying that the central bank, while making no promises, under current conditions is probably done raising short-term interest rates for this cycle.
Economic Projections
Interestingly, the FOMC did not touch their median projections for 3.8% unemployment at year-end 2023, which we now know will be quite accurate, or their median projection for unemployment of 4.1% in 2024. So, we know, the group is confident on this point.
On economic growth, the FOMC, at the median, upgraded 2023 from 2.1% to 2.6%, while taking 2024 down to 1.4% from 1.5%. The FOMC does not see the United States economy recapturing a 2% rate of growth again out past 2026 into the longer run, so while a recession is not in their base forecast an almost permanently sluggish economy is what is being projected.
As far as inflation is concerned, the committee sees 2023 ending at PCE headline growth of 2.8%, down from 3.2% and core growth of 3.2%, down from 3.7%. As of October, which is the most recent data available, headline PCE hit the tape at 3.0% with the core at growth of 3.5%. The group, at the median, sees 2024 PCE headline and core inflation both at growth of 2.4%.
Finally, the dot plot. The Fed Funds Rate. The median expectation for the Fed Funds Rate, by the FOMC, is for 5.4% this year, down from the 5.6% forecast made in September. This will obviously be accurate. For 2024, the FOMC, at the median, sees a Fed Funds Rate of 4.6%. The implication there is that the Fed will cut the target for this rate by 75 basis points in 2024. What's interesting about this is that there are 19 dots on the infamous dot plot. Six dots project a reduction of 75 basis points in 2024, while five dots project a reduction of 50 basis points and four dots project a cut of 100 basis points.
This is why financial markets roared as they did on Wednesday afternoon. Not because the FOMC is less dovish than have been Fed Funds futures markets, but because the membership of the FOMC pivoted at all, and so decisively at that. Three dots see cuts of either 25 basis points or less, while one dot sees cuts of 150 basis points. Those are the outliers. Fifteen of 19 dots expect to cut rates by 50 to 100 basis points. That's the story.
The Press Conference
All you really need to know about Fed Chair Jerome Powell's press conference is this: The Chair made sure that the public understood that the Fed was not in favor of restricting the economy any longer than what is perceived as necessary. Instead of "higher for longer," Powell said, "We're aware of the risk that we would hang on too long. We know that's a risk and we're very focused on not making that mistake."
Driving that point home, Powell later added that the committee was not likely to wait for inflation to hit the Fed's often stated 2% target before easing policy. On that 2% target, Powell stated.. "You'd want to be reducing restriction on the economy well before (hitting target), so you don't overshoot."
FOMC Note
This was the final policy decision for 2023, and as such, the final vote for a year or two for Chicago (Goolsbee), Philadelphia (Harker), Minneapolis (Kashkari) and Dallas (Logan). Rotating into those four voting slots in 2024 will be Cleveland (Mester), Richmond (Barkin), Atlanta (Bostic), and San Francisco (Daly). While Mester has been the outspoken hawk in this group, she is retiring early in 2024. An alternate will then vote in her place until a permanent president is chosen to lead the Cleveland district.
One last item. The Fed's quantitative tightening program rolls on as planned. There is a good chance that the Fed will soon be easing policy through the reduction of short-term borrowing costs while simultaneously tightening policy through what is a very necessary contraction of the monetary base and money supply.
Fed Funds Futures
Futures markets trading in Chicago are now pricing in an 87% probability for a first rate cut as soon as March 20, which will be the second policy meeting of the year. There is then an 85% likelihood priced in for a second rate cut on May 1. In all, futures markets are now projecting an 81% probability for rate cuts totaling at least 150 basis points in 2024.
Marketplace
It's key to remember that financial markets are not the economy and the economy is not financial markets. Equities and commodities can do very well in response to reduced borrowing costs and a cheaper U.S. dollar relative to its reserve currency peers. Markets will react negatively should a tougher economic environment impact earnings, but the market does not care about jobs lost or economic contraction until these factors impair corporate profitability and cash flow.
Equities got their breakout on Wednesday, shifting from a "sideways to upward" slog on light volume to "greased lightning" on steroids. Winners trounced losers at the NYSE by an 8 to 1 margin and by 3 to 1 at the Nasdaq. Advancing volume took a commanding 89.8% share of composite NYSE-listed trade and an 80.2% share of Nasdaq-listed activity. This all came on aggregate trading volume that grew 33% day over day for those NYSE listings and by 36% day over day for Nasdaq listings.
The S&P 500 gained 1.37% on trading volume that beat its 50-day trading volume simple moving average (SMA) by 31%. The Nasdaq Composite gained 1.38% on trading volume that beat its 50-day trading volume SMA by 43%. Wednesday, as a matter of fact, was the busiest day across the Nasdaq Composite since the last "triple witching" expirations event on September 15. By the way, the next "triple witch" expirations event is tomorrow (Friday).
Smaller caps hit the ball out of the park on Wednesday. The Russell 2000 gained 3.52%, the S&P SmallCap 600 advanced 3.35% and the S&P MidCap 400 increased 2.51%. All 11 S&P sector SPDR ETFs shaded into the green on Wednesday with every sector fund gaining at least 0.88%.
Oddity or Pragmatism?
The oddity of it all, while the mood was euphoric, was that across the 11 sector SPDRs, the top four finishers were all defensive in nature, with the Utilities XLU out in front, gaining 3.78%. The four defensive sectors were followed by the five cyclical sectors that in turn were followed by the two growth sectors.
This could be quite prophetic if the economy does go into a state of contraction, or even comes close. Even the Fed is telling us that, in their view, economic growth will not reach the level that we used to consider a floor (2%) for as far as they can see. Hmm.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly):Expecting 222K, Last 220K.
08:30 - Continuing Claims (Weekly):Last 1.861M.
08:30 - Retail Sales (Nov):Expecting -0.1% m/m, Last -0.1% m/m.
08:30 - Core Retail Sales (Nov): Expecting -0.1% m/m,Last 0.1% m/m.
08:30 - Import Prices (Nov):Expecting -0.7% m/m, Last -0.8% m/m.
08:30 - Export Prices (Nov): Expecting -1.0% m/m,Last -1.1% m/m.
10:00 - Business Inventories (Oct): Expecting 0.0% m/m,Last 0.4% m/m.
10:30 - Natural Gas Inventories (Weekly):Last -117B cf.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: JBL (2.58)
After the Close: COST (3.42), LEN (4.60)
(COST is a holding in TheStreet's Action Alerts PLUS portfolio. Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)
At the time of publication, Guilfoyle had no positions in any securities mentioned.
