Most markets are relatively unchanged this morning as last week’s risk-on “pivot-party” following the release of the Fed rate decision slows down heading into year-end.   

After a 6-week long “everything rally” since the last FOMC rate decision in November, many expected Fed Chair Powell to throw some water on the fire last Wednesday. He did the opposite when he mentioned that the timing of rate cuts was discussed at the 2-day meeting of Fed voters and as such the aforementioned rally hit the 7-week mark. For context, the S&P 500 is now up 12%, US 10-year treasury yields are lower by more than 100 basis points, and the US dollar is lower by almost 4% against a basket of currencies since Powell spoke in November.   

It’s worth noting that multiple Fed officials, 2 of which are current voters, have walked back the tone of the meeting somewhat:   

• Friday: NY Fed President Williams (voter) says “We aren’t really talking about rate cuts right now.”  
• Sunday: Chicago Fed President Goolsbee (voter) says “We’ve made a lot of progress in 2023, but I still caution everyone, it’s not done” and “We’ve got to get inflation down to target. Until we’re convinced that we’re on the path to that, it’s an overstatement to be counting the chickens.”   
• Today: Cleveland Fed President Mester (non-voter) says “The markets are a little bit ahead. They jumped to the end part, which is ‘We’re going to normalize quickly,’ and I don’t see that.”  

The market is turning a blind eye to the effective “higher for longer” statements above and pricing in chances of cuts as early as March. Other than potential position-squaring heading into the end of the year, event risk that may derail the “Fed pivot party” seems in short supply until 2024.   

Additional thematic highlights of the day as well as this week’s event calendar:     

• Oil & Gas producer BP said it will “...temporarily pause all transits through the Red Sea” after an increase in attacks on shipping vessels by Houthi militants in Yemen. Other companies are expected to do the same effectively cutting traffic going through the Suez Canal  
•  Goldman Sachs upgrades 2024 S&P 500 target by 9% to 5,100 from their previous target a month ago   
• Negative equity in US auto loans rises to levels not seen since April 2020  
• Germany’s Ifo business index fell in December to 86.4, versus an expected gain to 87.7 signaling a potential looming recession for the “powerhouse of Europe”  

Event Calendar:

• Monday: Fed’s Goolsbee speaks on CNBC  
• Tuesday: US Housing Starts; Canada CPI; Eurozone CPI; Bank of Japan rate decision; Fed’s Bostic speaks  
• Wednesday:  US Existing Home Sales; UK CPI; Bank of Canada meeting minutes; ECB Chief Economist Lane speaks on “Euro Area Outlook”  
• Thursday: US Weekly Initial Jobless Claims and GDP; Canada Retail Sales  
• Friday: US New Home Sales, Personal Income, Durable Goods, and UMich Indices; UK GDP  

EUR/USD is marginally higher on the day after last week’s 1.25% gain. That move was as high as 2.3% after the dovish Fed and not-so-dovish ECB and essentially retested (and failed) the highs seen in late November. The poor German Ifo index reading this morning has not affected the Euro much this morning but given today is the start of a 2-day ECB-led panel, policy outlook headlines are possible.

USD/CAD is slightly lower on the day, extending the strength of the Loonie versus the Greenback to 1.7% since the start of last week and 3.75% since the Fed’s first hint at a “pivot” in early November. Today’s increase in oil prices due to the news of BP pausing its travels through the Red Sea is also adding weakness to the pair. Tomorrow’s CPI YoY is expected to show a drop to 2.8% from the prior reading of 3.1%.

GBP/USD is slightly lower on the day, extending the retracement from last week’s highs to 1%. The pair was higher by almost 2% from the start of last week and 5.25% from early November's Fed meeting before giving up some of those gains late last week. There are concerns that a slowdown in economic growth will continue to broaden as we head into Friday’s final 3Q GDP print. Ahead of that is Wednesday’s CPI reading expected to show a drop to 4.3% YoY from the prior 4.6% print.

USD/MXN is slightly higher on the day and only .45% below levels at the start of last week. The pair was lower by almost 5.7% from early November’s Fed meeting at one point last week but has consistently failed to approach lows seen in July (3.7% lower from here). Wednesday’s retail sales data and Thursday’s Bi-Weekly CPI will be the primary catalysts for the week.

USD/BRL is marginally higher on the day and practically unchanged from the start of last week. While the Brazilian Central Bank cut their SELIC rate by 50 basis points as expected to 11.75%, the dovish Fed was still the major driver of the 2% move lower from Wednesday’s highs to Thursday’s lows. Tomorrow’s release of the BCB’s meeting minutes may shift them back into the spotlight as the Real still lives under one of the highest interest rates in major EM.