The recently released Federal Open Market Committee (FOMC) meeting minutes serve as a sobering reality check for markets, tempering the exaggerated reactions triggered by a marginal dip in US inflation.
- FOMC minutes reflect a cautious and pragmatic United States (US) Federal Reserve (Fed)
- Wall Street closed higher ahead of the US Thanksgiving holiday
- Dollar holds onto gains amid thin trade
- South African idiosyncrasies weigh on the rand
NO MENTION OF RATE CUTS
Tuesday’s FOMC minutes reveal a unanimous decision by Fed officials to maintain the benchmark lending rate within the 5.25% to 5.5% range for the second consecutive meeting.
The committee’s collective commitment to cautious navigation, emphasised the need for decisions to be guided by a holistic analysis of incoming data and its implications for the economic outlook and risk balance.
In addressing concerns about inflation, participants stressed the importance of further tightening if progress toward the committee’s inflation target was considered insufficient. Despite some moderation, US inflation remains stubbornly above the 2% long-term objective, posing challenges for businesses and households, particularly those with lower incomes.
Integral to the broader strategy is the reduction of the Fed’s balance sheet, a point underscored in the minutes. Some participants even suggested that this process could persist beyond a reduction in the target range for the federal funds rate.
The minutes also shed light on concerns about the potential impact of tighter financial and credit conditions on economic activity, hiring, and inflation. Despite the uncertainty, participants expressed readiness to adjust monetary policy as needed, signalling a nuanced understanding of the risks at play.
Market reactions following the minutes’ release were modest, with the US Dollar Index experiencing a slight gain. Thin holiday trade, however, saw the dollar carry these gains into the latter part of the week. Market participants are digesting the Fed’s commitment to a restrictive stance and its emphasis on patiently waiting for the effects of prior rate hikes to materialise.
The economic outlook, as portrayed in the minutes, highlights the delicate balance required in policy decisions. The labour market, although tight, has seen some easing, and the current restrictive monetary policy is acknowledged to be exerting downward pressure on economic activity and inflation.
Amid the acknowledged high degree of uncertainty in the economic outlook, policymakers underscored the need for careful consideration in decision-making. Risks include the potential stall in disinflation progress, a resurgence in inflation due to economic momentum, and downside risks to economic activity.
The minutes notably omit any mention of rate cuts, signalling a continued focus on the current restrictive policy. The committee remains dedicated to assessing the impact of previous rate hikes on the economy before contemplating any shifts.
The Fed’s meeting minutes portray a pragmatic approach, delicately balancing the need for continued caution in monetary policy with an acute awareness of the challenges and uncertainties in the economic landscape. The FOMC’s commitment to addressing inflation concerns while avoiding abrupt policy shifts underscores its dedication to achieving long-term economic stability.
US stocks closed higher on Wednesday, with the S&P 500 and Nasdaq each gaining 0.4%, and the Dow Jones rising 184 points. Despite durable goods orders falling more than expected, indicating an economic slowdown, the positive momentum was driven by tech, communication services, and consumer discretionary sectors. Online retailer, Amazon, and technology company, Microsoft, saw notable gains, reaching record highs, while aircraft manufacturer, Boeing, rose 0.7% after the Federal Aviation Administration cleared the 737 Max 10 jet for test flights. However, computer processor manufacturer, NVIDIA faced a 2.5% decline due to underwhelming results, and agricultural equipment company, Deere & Company, dropped 3.1% after a lower-than-expected profit forecast.
In the United Kingdom (UK), the FTSE 100 remained steady after three consecutive sessions of losses. Travel and leisure stocks, along with precious metal miners, were the top decliners, while oil and gas shares climbed 0.8%, led by BP’s 1.4% gain. Flash purchasing managers’ index (PMI) data indicated a stabilisation in the UK private sector, with the service economy expanding and a decline in manufacturing production. Independent energy regulator, Ofgem, increased its price cap by 5% to address rising wholesale energy prices. Corporate updates included financial services brand, Virgin Money, reporting profits below market estimates, and low-cost airline, Jet2, posting a significant 19% increase in operating profit.
Frankfurt’s DAX 40 maintained modest gains, reaching its highest level since 10 August at 15,970 points. Investors awaited the minutes of the European Central Bank’s (ECB’s) October meeting, which factored in expected interest rate cuts. The latest PMI data for Germany indicated a milder contraction in the private sector.
Following a second consecutive day of gains, South Africa’s JSE All Share Index saw a 1% increase, reaching around 75,540. Traders focused their attention on the US FOMC minutes, as well as the South African Reserve Bank’s (SARB) policy decision to keep rates steady at 8.25%, as widely anticipated. Fashion retailer, Mr Price Group, surged over 10%, with the anticipation of improved performance in the second half of the year. Conversely, grocery and hardware retailer, Spar Group’s shares slipped nearly 4% as the retailer expected an up to 86% decline in earnings for the 2023 financial year.
A LOOK AT GOLD AND OIL
Brent crude futures slipped below $81/barrel on Thursday, extending losses from the previous session after US crude inventories surged by a staggering 8.7 million barrels, far surpassing the expected 1.16 million barrel increase. The abundance of supplies, especially from non-OPEC nations, has cast a shadow on oil prices, prompting speculation about potential extensions or deepening of supply cuts by the expanded Organisation of the Petroleum Exporting Countries, OPEC+. On Wednesday, crude prices took a nearly 5% hit before recovering as OPEC+ postponed its policy meeting to resolve disputes over output quotas for African members like Angola and Nigeria. Analysts anticipate Saudi Arabia will extend its voluntary production cuts into 2024, while other members are likely to commit to existing quotas.
Gold stabilised above $1,990 an ounce on Thursday, close to its six-month high. Investor focus remains on the Fed’s monetary policy outlook. Despite a larger-than-expected drop in new claims for unemployment benefits and a modest increase in US inflation expectations, the latest FOMC minutes revealed a preference for maintaining a restrictive monetary policy, with no imminent indication of rate cuts. Market consensus leans towards the Fed maintaining rates in December, with reduced expectations for cuts in March. In the eurozone, the ECB appears to have concluded its rate hikes, with some investors anticipating a possible rate cut in April next year. Meanwhile, in China, the People’s Bank of China left its one and five-year loan prime rates unchanged at 3.45% and 4.2% respectively, at the November fixing, aligning with market expectations.
The US Dollar Index maintained its position around 103.8 on Thursday, supported by robust data that prompted a reassessment of the Fed’s monetary policy outlook. However, trading volumes remained thin due to holidays in Japan and the US. Wednesday’s data revealed a greater-than-expected decline in new claims for unemployment benefits, accompanied by heightened inflation expectations for both the near and long term.
The euro surpassed $1.09/€, nearing its late August peak, following the release of ECB meeting minutes. Policymakers emphasised the potential for further rate hikes, despite expectations that the Central Bank has ended its rate hiking cycle. Simultaneously, the latest PMI survey indicated a slower contraction in eurozone business activity for November, despite ongoing employment declines since the start of 2021 and a six-month high in input cost inflation. Divergent views coming from the ECB policy makers, including dovish comments from Governor of the Bank of Portugal, Mario Centeno, and President of Deutsche Bundesbank, Joachim Nagel, suggesting that rates are close to their peak, have contributed to market uncertainty.
The British pound consolidated gains above $1.25/£, reaching its highest level since early September, fuelled by shifting expectations regarding the Bank of England’s (BoE) timeline for cutting rates. Stronger-than-anticipated flash PMI data revealed stabilised private sector activity in November, prompting investors to perceive a higher likelihood of a 25 basis-point BoE rate cut, fully factoring it in for September.
The South African rand traded around R18.75/$. The rand’s recent depreciation, particularly against the US dollar, euro and pound is attributed to idiosyncratic risks, including South Africa’s stance against Israel, issues at Transnet and the country’s major ports, and the potential introduction of a two-pot pension system next year. The currency’s 2.60% week-to-date depreciation, the worst in the emerging-market currency basket, suggests local vulnerability. Meanwhile, the SARB Governor, Lesetja Kganyago, reaffirmed the bank’s commitment to decisive action in preserving price stability, while keeping interest rates steady at 8.25%.
The rand is trading at R18.81/$, R20.52/€ and R23.59/£.
Sources: Refinitiv, Reuters, Investing.com, Trading Economics and Federal Reserve.