Jan 31 Morning Note
Where Are Interest Rates Headed? What to Expect From the Fed Meeting
Equity futures are mixed- S&P down 0.4%, Nasdaq is getting hit hard down 0.9% and Russell 2000 is up 0.3%. This comes after stocks closed near unchanged levels yesterday.
On the macro side, we continue to see disinflation in data as France, Germany, and Australia have all reported cooler-than-expected inflationary data in the last 48 hours. This morning’s data on US labor costs cooled by more than forecast in a fresh sign of easing inflation pressures. The employment cost index, which measures wages and benefits, increased 0.9% in the fourth quarter, the smallest advance since 2021, after rising 1.1% in the prior three-month period, according to Bureau of Labor Statistics figures released Wednesday. Global sovereign bond yields have been lower as a result of that, and in turn keeps pressure on Central Banks to embark on rate cuts sooner.
At the time of writing, the US 10Y yield is at 4.01%, down 1bp from yesterday, while 2Y is at 4.31%, 3bps lower from yesterday.
On the earnings front, MSFT and GOOGL reported strong earnings but risk sentiment soured as the expectations were extremely high. Both of the tech giants narrowly beat revenue and earnings estimates, but saw an underwhelming reaction in after-hours trading. Combined the two companies represent a near $5trn market cap, equating to 11.5% of the S&P 500 so very important for market direction alongside Apple, Amazon and Meta (a combined 13% of the S&P) who report tomorrow night. In addition last night, chipmaker AMD (market cap $278bn) fell as much as -6% after hours post a disappointing sales outlook.
Today's focus is the Federal Reserve's decision at 2 PM EST. Market expectations suggest the Fed will maintain current interest rates. The key focus, however, will be on their communication regarding the pace and timing of future rate reductions. The expectation is that the Fed will remove its "tightening bias" from its policy statement, a stance that previously indicated a likelihood of rate hikes. This change is anticipated because a majority of Fed officials have expressed the belief that further rate increases are unnecessary, and maintaining a tightening bias might lead to confusion. With no economic or rate forecasts available, Fed Chair Jerome Powell's press conference at 2:30 PM will be scrutinized for clues about potential shifts in the central bank's policy approach this year. Looking ahead to the March meeting, it's believed that Powell will keep options open for a possible rate cut but won't signal any immediate need for rate reductions, leaving the timing of any such action open-ended.
Elsewhere we got our first look at China’s official 2024 PMI data which showed that manufacturing activity shrank for the fourth consecutive month in January albeit the reading slightly improved to 49.2 versus 49.0 in December, highlighting that the sector remains under pressure amid a weak economic recovery. Meanwhile, the official non-manufacturing managers’ index continued to outperform as it edged up to 50.7 in January from 50.4 in December. Shanghai composite and Hang Seng indices were lower by 1.4% as investors continue to shun these markets.
Other news:
Investors punish Microsoft, Alphabet as AI returns fall short of lofty expectations RTRS
Judge voids Elon Musk's 'unfathomable' $56 billion Tesla pay package RTRS
Boeing postpones 2024 outlook, CEO says company has 'much to prove' RTRS
Trump Risks Losing More Than Half of Swing-State Voters If Found Guilty BBG