December 13, 2023

“Following a volatile session yesterday, markets are gearing up for the hotly anticipated Federal Reserve policy decision this evening, where investors will parse Chair Powell’s every word in an attempt to gauge the path of interest rate cuts next year. In particular, the dot-plot projections of future interest rates tend to be a strong catalyst for volatile moves.”

Tim Hallinan – Trading Director

Main Headlines

Argentina’s new Economy Minister, Luis Caputo, announced on Tuesday a series of economic measures aimed at addressing the country’s severe crisis. The plan includes a devaluation of the peso by over 50%, reaching 800 per dollar, along with the reduction of energy subsidies and the cancellation of tenders for public works. Caputo acknowledged that the measures would cause short-term pain but emphasised their necessity to address the fiscal deficit and curb triple-digit inflation. The move comes after libertarian President Javier Milei assumed office on Sunday, with Caputo highlighting the need to tackle a longstanding fiscal deficit, which he stated has persisted for 113 of the last 123 years, contributing to Argentina’s economic challenges.

On Tuesday, Britain’s Financial Conduct Authority (FCA) expressed concerns about the levels of interest and fees charged by certain investment platforms. The regulator issued warnings to 42 companies, indicating its potential intervention to ensure fair value. The FCA specifically raised issues about the interest earned by investment platforms on customers’ cash balances, which has increased with rising interest rates. Additionally, the practice of charging a fee for holding cash, known as ‘double dipping,’ was flagged as a concern. The FCA has called for investment firms to cease this practice, setting a deadline of February 29 for the necessary changes to be implemented.

GBP

Sterling has slid over 0.3% this morning after the UK economy contracted in October for the first time since July. Intraday volatility spiked yesterday as markets struggled to find direction, and sterling was pulled in opposite directions by slowing wage growth, booming eurozone optimism, and US CPI, before ending the day relatively flat. This morning, however, the pound was knocked by a worse-than-expected 0.3% month-on-month fall in GDP in October, suggesting that weak economic growth may force the Bank of England’s hand towards rate cuts sooner than markets currently expect. This stands in contrast to the most recent PMIs, however, which returned to growth and even outpaced the US in the services sector in November. The Bank of England will likely take cues from both when it tunes its rhetorical language in tomorrow’s policy decision, where most expect hawkish pushback against rate cut bets for next year.

EUR

The euro has drifted downwards this morning after notching small gains in yesterday’s session. Its main boost came from the surging German optimism about the euro area economy displayed by the ZEW economic sentiment survey, driven by the doubled expectations for interest rate cuts next year that should ease borrowing costs for European firms. Industrial production is today’s sole market event for the euro, the contraction of which is expected to have decelerated significantly in October to -0.3%. Market focus remains on the ECB’s policy language and economic projections in its rate decision tomorrow, as investors attempt to gauge when and how quickly rate cuts are coming.

USD

The dollar is edging up ahead of a highly anticipated FOMC policy statement and economic projections later this evening. US consumer price growth cooled slightly as expected to 3.1% in November, and ticked up slightly on the month-on-month figure to 0.1%, in a mixed report that sparked some initial dollar strength but ultimately did little to convince markets to budge on rate cut bets for next year. The US 10-year Treasury yield remains just north of a six-month low at 4.20%, down from a late-October peak above 5%. The Producer Price Index will provide the Fed with a last-minute final clue ahead of its federal funds rate decision tonight, where an almost certain hold narrows the focus to the accompanying statement and economic projections. Powell will likely try to contain market expectations and push back against the aggressive rate cut bets priced into markets, in an effort not to greenlight a further easing in financial conditions that would potentially allow inflation to flare up again. In particular, policymakers face a tough task in fine-tuning the dot plot graph of their interest rate projections, which catalysed a dollar surge in September when policymakers were extremely hawkish.

Markets

US equity futures registered gains as investors anticipated the Federal Reserve’s final decision for the year, with recent data strengthening the belief that policymakers will proceed cautiously in declaring victory over inflation. Contracts for the S&P 500 and the Nasdaq 100 indicated potential increases after the S&P 500 reached its highest point since January 2022 on Tuesday.

Main Economic Data/Central Banks/Government (All Times CET)

8:00am.: UK GDP, Industrial Production, Construction Output
11:00am.: Eurozone Industrial Production
2:30pm.: US PPI
4:30pm.: US Crude Oil Inventories
8:00pm.: US Federal Reserve Rate Decision
8:30pm.: US FOMC Press Conference

To learn more about Ballinger Group, please visit our website or our LinkedIn page.