The latest US CPI data came and went without incident, witha mild uptick in inflation not enough to rattle market sentiment. But now it’sover to the FOMC whose messaging could rebuke the market’s optimistic easingexpectations for 2024.
For November, CPI added 0.1% on a month-on-month basis. CoreCPI remains stubborn above the 4% level (year-on-year). There wasn’t anythingtoo drastic in the inflation details, however there was enough to suggest that theFed will likely remain steadfast with tight monetary settings for longer thanthe market would like. The central bank will probably soften the inflationoutlook a fraction while also adjusting the dot plots to allow more monetarypolicy easing at the backend of 2024.
Though even if the FOMC does rein-in their inflation outlookbased on progress made on the CPI front in recent months, a notable gap willlikely still exist between the Fed and the broader financial market when itcomes to the projected path of interest rates in 2024.
The degree of misalignment between what Jerome Powell saysand what the market hopes for regarding interest rates will drive the bondmarket reaction and the performance of equities. It’s one thing if the FedChairman does indeed push back against expectations for an early FOMC pivotnext year, but whether the market believes him or not is an entirely differentmatter. Either way we could be in for some fireworks as Powell’s pressconference unfolds.
Ahead of the Fed meeting we also will get the next batch ofPPI data which could influence expectations on what rhetoric we will hear fromthe FOMC.
Gold is settling around strong support in the $1980 region,with any hopes of a move back to $2k and beyond likely being dependent uponinvestors having a dovish interpretation of the FOMC messaging. The USD andbond yields have found some more solid ground lately which has made the tasktougher for gold to try and move higher. If the Fed goes out of their way to soundhawkish then gold could be headed south if yields move higher. Whichever waythe greenback and bond yields go in response to the FOMC outcome, gold willprobably do the opposite.
Elsewhere, crude oil is on the slide again with the WTIcontract again below the $70 per barrel level. Speculators in the oil marketare not too concerned about the voluntary cuts announced by OPEC+, while recentdata out of China also raises questions about just how the demand picture willshape up for oil heading into next year. In essence, there are more negativethan positive vibes for the oil market right now which is keeping the priceunder pressure.
Equity markets are in a reasonably buoyant mood ahead of theFed meeting, though I expect that we will see trading ranges tighten and somerisk taken off the table in some quarters ahead of what shapes as a key eventrisk for financial markets. In summary, the words to be uttered by JeromePowell (the Fed Chairman) have the potential to either scuttle the currentmarket rally or perhaps give it extra legs into year-end.