Market 12/14: Market continues to push expectations for early Fed rate cut

Updated Fed's US economic forecasts at FOMC

• Read more about the Fed's interest rate decision here.

Summary of Fed's economic forecasts after yesterday's FOMC:

• Economic growth: Fed raises 2023 GDP growth forecast but lowers 2024 forecast.

• Additionally, Fed also raises long-term unemployment rate forecast from 4.0% to 4.1%.

  • Nevertheless, Fed still sets a fairly clear soft landing target.

  

• Fed projects average fed funds rate at 4.6% in 2024, 3.6% in 2025.

  • Long-term interest rate projected at 2.5% (upper table).

However, the market is currently pricing fed funds rate at only 3.8% by end of 2024 — much looser than Fed's 4.6% forecast.

• The market even bets 21% chance Fed will cut rates from January 2023 (but this may be unlikely).

Fear & Greed Index on stock market reaches 73 — highest since August 2023: investors more risk-taking and greedy due to expectations of early rate cuts

Initial jobless claims near the year's lowest level

Initial jobless claims last week fell to 202,000 — nearly the lowest level of 2023.

• This indicates the labor market remains tight and relatively fully employed.

• New York and Pennsylvania saw the largest drops in claims.

• Continuing claims rose modestly to 1.876 million — still below the key 1.9 million threshold.

Retail sales increase in November kicks off holiday shopping season

• November retail sales increase +0.3% M/M (supported by October data revised down to -0.2% M/M), pushing sales up +4.1% Y/Y.

Core retail sales beat expectations:

• Excluding autos: +0.2% M/M (expected -0.1% M/M)

• Excluding autos and gas: +0.6% M/M (expected +0.2% M/M)

→ Pushing core retail sales up +4.9% Y/Y

• Gas station pump prices fell the most.

Food services and non-store retailers surged from previous month.

• Notably, this increase comes from credit card debt: consumers continue borrowing at over 20% interest rates to spend…

  —> credit card debt burden may explode in late 2024 or early 2025.

Joining the Fed club: ECB and BOE hold rates steady in December 2023 meeting

• ECB keeps main refinancing rate at 4.50% unchanged as expected.

• Deposit rate remains at 4.00% as expected.

• ECB will gradually reduce the stimulus package worth 1.7 trillion euro created during the pandemic

• ECB also announces that reinvestments under the pandemic emergency purchase program (PEPP) will end by the end of 2024.

  • FYI: In the second half of 2024, the PEPP bond portfolio will reduce by an average of 7.5 billion euro per month (equivalent to 8.2 billion USD).

ECB President Lagarde: We have not discussed rate cuts at all BUT the market has priced in 5.3 rate cuts in 2024.

=> It can be said that although inflation in the Eurozone is falling faster than in the US, ECB is maintaining a more hawkish stance than the Fed. But the market doesn't believe Lagarde's statement!

BoE also kept rates at 5.25% as expected.

• The Committee maintains its recommendation that rates should be "restricted at reasonable levels for a sufficiently long period" to curb inflation.

Adobe Q4 FY23 earnings update

• RPO (Remaining performance obligations - unrecognized revenue): +13% up to 17.2 billion USD

• Annual Recurring Revenue (ARR) from Adobe's Creative Cloud: +13% up to 12.4 billion USD

• Annual Recurring Revenue from Document Cloud: +22% up to 2.8 billion USD

• Revenue: +12% up to 5 billion USD (30 million USD above expectations)

• Non-GAAP EPS: 4.27 USD (0.13 USD above expectations)

• FY24 revenue guidance: 21.4 billion USD

Although sales and EPS beat estimates, investors are disappointed with Adobe's bleak sales outlook for 2024…

→ Stock down nearly -6% in early trading today.

Other news

1. Credit Suisse has fired its entire asset management team in China, abandoning ambitions to become one of the largest asset managers in the country.

2. US House officially authorizes impeachment investigation of President Biden:

   • This investigation aims to determine whether Biden improperly benefited from his 53-year-old son Hunter Biden's overseas business dealings.

3. Signs of the end of the Yen Carry Trade trend (JPY interest rate differential trade):

   • The Yen is undervalued by ~40% against the US dollar on a PPP basis: the market will soon correct back…

   • Previously, BOJ and Fed policies were opposite, but now BOJ has signaled the possibility of ending the negative interest rate period.

   • Double top formed on the monthly USDJPY chart

   • Stochastics chart gives sell signal in overbought territory…

4. Large-cap tech stocks continue to be sold off today despite market indices heading towards record highs.

   • The Dow index has just surpassed 37,000 for the first time, while most "Magnificent 7" stocks declined.

   • Large-cap tech stocks have wiped out about $150 billion in market capitalization

5. The U.S. Centers for Medicare & Medicaid Services (CMS) has announced amendments to the law to control prices for prescription drugs.

   • Pharmaceutical companies may have to rebate prescription drugs if their prices rise faster than the inflation rate.

     

     6. Uranium prices have risen to a record high of $85/pound, the highest in 16 years (since January 2008).