Market 01/19: Budget agreement passed preventing government shutdown

Congress passes temporary budget agreement

Bipartisan parties reached an agreement yesterday to keep the government open until early March, extending time to find common ground for a long-term 2024 agreement.

Chicago Fed President Goolsbee's remarks continue the hawkish message from the Fed

Goods inflation has returned to normal, services inflation also progressing better than expected.
Unemployment rate and labor market not yet a current concern.
If inflation turns and rises again, the Fed may consider raising interest rates.

=> Goolsbee's remarks still align with Viet Hustler's previous forecast about the beautiful hawkish message the Fed will convey to the market this month (details here).

Rate cut expectations are gradually decreasing after Fed officials warned the market has expected too much.

Currently, the number of rate cuts the market expects is about ~5 times this year (down from 7) though still higher than the Fed's estimate (3 times).

Banks' demand for the emergency BTFP bailout package surges to a new record high

Fed data shows BTFP loans at a new high of 161.5 billion USD:

up +14.3 billion USD from the previous high of 147 billion USD,
and the largest weekly increase since 04/05.

It seems the Fed is struggling to control the arbitrage situation (price discrepancy), as banks can borrow at lower rates (4.85%), instead of the discount window at 5.5%.

According to New York Fed, the BTFP program may end on 03/11 for the above reasons.

BTFP has increased by more than 47 billion USD since arbitrage trading emerged.

Ending BTFP could significantly impact banks' profits from exploiting the price discrepancy opportunity, (though overall market impact is insignificant).

UMich inflation expectations drop to lowest since 2020

Contrary to expectations of stability, the overall January inflation expectations estimate drops to 2.9% (1 year) and 2.8% (5-10 years).

Consumer sentiment index surges 9.1 points to 78.8 (largest monthly increase since 2005).

Current conditions index: 83.3 (vs 73.3 previous).
Consumer expectations: 75.9 (vs 66.4 previous).

→ Consumer sentiment index has risen nearly 60% from the June 2022 low, potentially creating positive momentum for the economy.

Consumers still expect the Fed to cut rates this year.

The improvement in inflation expectations comes from downward pressure on durable goods and auto purchase prices.
However, there seems to be no expectation of interest rate cuts for the housing market.

Existing home sales drop to the lowest level since 1995

According to NAR data, December existing home sales decreased -1.0% MoM, lower than the expected +0.3%.

Total December 2023 existing home sales reached 3.78 million - the lowest since 2010.

However, on an annualized basis, this is the worst figure in nearly three decades.

The supply shortage is still keeping home prices high.

Median sales price up +4.4% YoY to $382,600 in December.

However, the recent downward trend in mortgage rates over the past 2 months is expected to increase housing inventory in the coming months.

December PCE inflation forecast

Banks' December PCE forecast: m/m PCE will increase higher than the previous month.

However, y/y figures may ease slightly in core PCE categories.

Other news:

Biden announces forgiveness of $5 billion in debt for over 80,000 students.
- Total under Biden: government has forgiven >$136 billion in student debt, more than any previous president.
Ford cuts F-150 electric pickup production due to weak demand. EV sales expected to grow slower in 2024.
China's largest broker, Citic Securities, has banned short selling of securities for some clients, after the Chinese stock market has declined significantly since the beginning of this year.
A Boeing 747-8 from Atlas Air at Miami International Airport caught fire mid-air after engine trouble but landed safely.
Japan's SLIM smart lander successfully made historic moon landing today.
CMA CGM, the world's third-largest container shipping group, is struggling to schedule due to attacks disrupting Red Sea maritime traffic.
- Some Suez Canal ships continue voyage with French Navy support.
- Cargo volume through Suez Canal and Bab al-Mandab Strait has halved since Red Sea conflict.
Cohere (AI startup backed by Nvidia and Oracle) in talks to raise $1 billion.
- If successful, this funding could value the company higher than last year's $2.2 billion.
Delta Air Lines expects to proceed with 100 Boeing 737 Max 10 order placed in 2022, delivery expected in 2025.
- The airline will also extend US-Israel flight cancellations until 04/30.