Since the last Fed meeting, treasury yields have dropped off dramatically, reflecting expectations from investors that not only may be Fed be done raising interest rates, but also that they may start cutting rates early in 2024. Back in September, Fed members forecast the potential for one more hike from here by the end of 2023 (which looks unlikely), and the potential for two rate cuts in 2024, more likely in the second half of the year.
While investors have increasingly been pricing in a more dovish Fed next year, comments of the last six weeks from actual Fed members have been neutral to hawkish indicating that they are not done fighting inflation and they don’t want to declare victory too soon.
Today’s US producer price report showed inflation pressures at the corporate level continuing to ease, most notably Core PPI (2.0% vs street 2.2% and previous 2.4%), but it’s unclear if that will be enough to sway the Fed as producer prices tend to be more volatile than other measures of inflation. Yesterday’s consumer price report showed headline inflation easing much more slowly than last month and core inflation stubbornly didn’t budge at all, so Fed members may have a point. Tomorrow brings US retail sales numbers.
In addition to the decision and the Fed Funds dot plot, traders may also look today at comments about the economy, the health of the banking system and consumer spending/debt management. Central bank week continues tomorrow with a triple header of news from the European Central Bank, the Swiss National Bank and the Bank of England.
Heading into the trading day, US index futures are up 0.1% to 0.2%. European trading finds the Dax up 0.1% and the FTSE up 0.3%. Treasury yields are steady. Energy markets are trying to bounce back with Crude Oil up 0.8% and Natural Gas up 0.5%. Metals action finds Copper holding steady and Gold up 0.4% sitting right on $2,000/oz.