From Marc to Market:
Overview: The continued easing of US price pressures has strengthened the market's conviction that the Federal Reserve will further slow the pace of rate hikes and that the terminal rate will be near 5.0%. The decline in US rates has removed a key support for the US dollar, which has fallen against all the G10 currencies this week. The Dollar Index has now retraced half of what it gained since bottoming on January 6, 2021. Meanwhile, there are positive developments elsewhere. The German economy appears to have stagnated in Q4 22 rather than contracted, and the UK economy grew in November when most economists expected it to have shrunk.
The Japanese yen has led the move against the dollar, rising 2.8% this week amid heightened speculation that the Bank of Japan could take another step away from its easy monetary policy as soon as next week's meeting. Still, in the past two sessions, the BOJ has bought around $75 bln of government bonds, and still the 10-year yield traded through its 0.50% cap. Investors continue to look beyond the Covid surge in China, and the lack of transparency, and do not seem disturbed by "golden shares" the government will take in two leading companies. Foreign investors have poured back into Chinese equities, buying around $2 bln today alone. China's CSI 300 gained 2.3% this week and the index of mainland companies that trade in Hong Kong rose 3.5% this week....
*****....Perhaps, just as significantly, the market is even more confident of a rate cut before the end of the year. The implied yield of the December Fed funds futures contract has fallen to a new low below the September contract of 34 bp. The Fed seemed to go out of its way to include in the December minutes the observation that no official expected it to be appropriate to cut rates this year. And yet, the market has said not only will you cut a quarter-point, but after the CPI, report, there is better than a one-in-three chance that rates are cut by 50 bp instead before the end of the year. There is also, the Fed funds market implies, about 30% chance that a cut take place in Q3. According to the Bloomberg's index, financial conditions in the US yesterday were the easiest since last April. This seems a bit exaggerated, intuitively, given where rates, stocks, funding spreads, and the dollar are trading compared to last April. Still, a few weeks ago the Fed was concerned about the premature easing of financial conditions. Today, the Us reports December import/export prices and the preliminary January University of Michigan's consumer survey, where inflation expectations are the focus. The Fed's Kashkari and Harker are scheduled to speak today. Harker's views are known, and Kashkari is seen to be among the hawks now, but we suggest it has better considered him an activist, i.e., advocating strong action in whatever direction the Fed is moving....
....MUCH MORE
