Equities and the US dollar began this week in a rather muted fashion after a trend-setting period.
The US Federal Reserve famously signalled the end of its policy tightening last week.
“It could be a sign that the economy is normalising and doesn’t need the tight policy,” Fed Chair Jerome Powell said, signalling that markets could face up to three rate cuts in 2024.
The Fed dot plot – a key metric in determining Fed voting patterns in the future – stressed this.
The median projections for the Federal Open Market Committee for next year show that the mid-point of interest rates falls between 4.5 per cent and 4.75 per cent.
Markets lapped up the Fed’s dovish undertones and the dollar came under selling pressure. But looking forward, what should we expect?
Looking at the Chicago Mercantile Exchange’s FedWatch Tool, while the odds of a rate cut at January’s meeting have increased to 10.3 per cent now, from 2.1 per cent a week earlier, it still seems more likely that the first cut will be delivered at the March 20th meeting (67.5 per cent probability of a rate cut versus 42.3 per cent a week ago and 28 per cent a month ago).
Yet again, the next few months will be highly dependent on data.
Markets are bracing for a soft landing “Goldilocks” scenario – a perfect combination where inflation continues to slow, employment remains robust and economic growth shows even expansion.
The Consumer Price Index figures released last week showed that year-on-year inflation slowed to 3.1 per cent in the US in November, lower for the third consecutive month.
Concurrently, US job growth remains strong. A total of 200,000 new jobs were added in November, while the overall unemployment rate, at 3.7 per cent, hovered around a 50-year low, amid an increasing labour force participation rate.
To this, add robust consumer spending, which accounts for more than 70 per cent of total gross domestic product, and the US economy seems to be heading towards the Goldilocks scenario.
However, the caveat is that if these conditions continue, then the Fed may not be forced to cut rates and would rather hold them unchanged in March.
An expanding economy coupled with slowing inflation makes little sense, especially considering the US is heading into a presidential election year, which historically means more fiscal spending that exert pressure on prices.
Therefore, along with keeping tabs on how option pricing changes for the coming Fed meetings via the CME FedWatch tool, keep a closer eye on US growth figures.
This starts with December 22’s quarter-on-quarter GDP print. Expectations are for growth to have increased to 5.2 per cent in the third quarter of this year, well above the previous reading of 2.1 per cent.
This is followed by the personal consumption expenditure index – the Fed’s preferred measure of US inflation.
The figure is expected to further slow down to 2.8 per cent versus a previous print of 3 per cent.
The weekly jobless claims report is due on December 21. A combination of stronger GDP, weaker inflation and stronger jobs will continue to put downward pressure on the US dollar, while equities will benefit with higher moves.
These will, perhaps, be the final pieces of market-moving news to focus on as we enter the final weeks of the year.
With institutional traders, funds and banks logging off and staying on the sidelines of the holiday period, liquidity will dry up and, as a result, intraday moves will most definitely be exaggerated starting from next week.
Looking at technicals, I would not be surprised if we see the S&P 500 index retest its record high above 4,800 when I write my next column.
Momentum is with equities now, with the Dow Jones Industrial Average already at a record high.
Turning to gold, following the past two months in which the precious metal moved from lows of $1,810 to highs of $2,148 levels, I think prices will now calm down and remain in a tight range.
While $1,980 must remain the lower support level, $2,070 should hold as an upper resistance through the start of next year.
Finally, amid all the bullish sentiment, Bitcoin broke through $40,000 and faced stiff resistance in the charge towards $45,000 levels.
The momentum is certainly with Bitcoin bulls, and if the Goldilocks scenario further solidifies over the next few months, those record highs of $69,000 will be very much in sight.
Gaurav Kashyap is a risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers
