US EARLY MORNING: Equity futures and Treasuries are continuing the post-Fed rally; ECB and BoE policy announcements ahead

US PREMARKETS: US equity futures are trading higher after a dovish FOMC policy announcement on Wednesday, where the US central bank signalled that three 25bps rate cuts were coming in 2024, with Chair Powell confirming that rates were unlikely to be hiked further, and the Fed was very focussed on not making the mistake of keeping rates too high for too long (our review is below). European markets are braced for a heavy slate of central bank activity, with policy decisions due from the ECB (rates seen unchanged; focus on the forecasts), BoE (rates seen unchanged in 6-3 vote); this morning in Europe, the SNB maintained its policy rate at 1.75%, as expected, and said it was prepared to be active in the FX market as necessary (removing reference to specific “selling”). Treasuries are continuing to rally, with 10yr yields falling below 4.0% for the first time since August as money markets price six 25bps rate cuts by the end of next year (vs four, with a chance of five prior to the Fed’s policy update). 

FOMC REVIEW: The announcement was dovish. The Fed left rates unchanged at 5.25-5.50%, as expected, and softened guidance, stating that in determining the extent of "any" additional policy tightening, it will take into account the cumulative tightening of monetary policy, lags, inflation dynamics, economic and financial developments (Chair Powell later said that the word "any" was added to show that the Fed thought it was at or near the peak for rates, though participants did not want to take the possibility of further hikes off the table). The Fed also acknowledged that inflation has eased, but remains elevated, and it maintained language that tighter financial and credit conditions for households and businesses were still likely to weigh on activity, hiring, and inflation. Within its forecasts, it lowered its 2024 rate projection to 4.6% (from 5.1%, exp. 4.9%), 2025 was lowered to 3.6% (from 3.9%, exp. 3.6%), 2026 was kept at 2.9% (exp. 2.9%), and the longer run view was kept at 2.5% (exp. 2.5%). Powell said that inflation had eased without a significant rise in unemployment, but reiterated that inflation was still too high, and the central bank is fully committed to returning inflation to 2%. Policy is well into restrictive territory, and its full effects were likely not yet felt, reiterating that policy will be kept restrictive until the Fed is confident on the path to 2% inflation. The Fed chair talked about how policymakers were still focused on the question of whether rates were high enough, and while it was unlikely to hike further, it did not want take exclude that possibility. Still, Powell said that the Fed was very focussed on not making the mistake of keeping rates too high for too long. Powell said the Fed discussed the timing of rate cuts at the meeting, and there was a general expectation that rate cuts will be a topic of conversation going forward, adding that the Fed will proceed carefully. Wells Fargo's economists said the doves won the day; "the door was left ajar for additional tightening, but the 'dot plot' signals that this was not the base case for most participants," and it adds that "after a period of nearly two years of rapid monetary policy tightening, a pivot to cuts next year seems like the most probable outcome." Money markets are now pricing six full 25bps rate cuts by the end of this year (before the meeting, four were fully priced, with a decent chance of a fifth). The first rate cut is fully priced for March (vs May prior to the Fed's announcement).

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14 Dec 2023 - 09:30- Research Sheet- Source: Newsquawk

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