Breakfast Bites - What's on Fed watch?

Rise and shine everyone.

It’s a big day for the Macro folks out there. We have the Fed rate decision at 2 pm ET and the Treasury Quarterly Refinancing Announcement (which we discussed yesterday). We also have the quarterly Employment Cost Index, a metric for wages that the Fed watches very closely.

But we also have a whole host of other macro data….

What we're watching from the Fed today

Dropping the Tightening Bias? 

The Fed kept the door open to hikes with "additional policy firming". Will this change to a more neutral stance? Discussions around being careful and data dependency will likely continue but, the language around policy and inflation will be on watch.

Pace of Cuts 

Everyone's looking at the timing of the first cut, we're more interested in a discussion on the pace of cuts. A clear indication of timing is less likely. As for pace, they've already said that they will cut three times the market is pricing six times. So we want to hear whether they will waver on the three cuts or not.

QT 

The balance sheet roll-off was mentioned in the last minutes and we want to see if further discussion has taken place. Gov. Waller pointed out a 10-11% GDP threshold for Bank Reserves which is about $2.5T and current reserves are still at about $3.5T, so liquidity remains. We want to look out for hints on timing, rather than pace. Too early for pace.

US Equity futures are trading lower this morning after Microsoft, Google, and AMD all saw shares sink post earnings. Big Tech stocks are all trading lower in the pre-market and Samsung’s disappointing earnings is adding to the woes. China isn’t faring too well this morning either and that’s weighing on the market to some extent. Europe, on the other hand, is hanging in there after Novo Nordisk smashed earnings.

The US Dollar Index is seeing some strength, while yields are pulling back. Gold is flat and the Oil has pulled back to below $77/bbl. Remember, Gold is always an iffy trade on Fed day. Bitcoin is lower.

Asia and Australia

• Asian markets mixed this morning.

• The big news is the Australian Index hitting a record high, with REITs and financials outperforming, after a softer inflation reading. Quarterly inflation came in at 0.6% vs. 1.2% prior and the Monthly CPI indicator came in at 3.4% vs. 4.3% last month. The market is no longer pricing in another hike for February’s meeting and in fact, a cut for Q4 is now being discussed. The AUD fell on this news and continued to fall on China PMI data news.

• China’s official manufacturing PMI continues to languish in contractionary territory for the 4th straight month while improving only slightly to 49.2 from 49 in December. Amid deflationary pressures, the market is seeing this as a negative sign, given the government is stalling on fiscal measures.

• Japanese equities closed higher, after starting off lower on disappointing data. Industrial production came in positive at 1.8% up from last month’s -0.9% but missed estimates of 2.1%. Retail sales came in lower at 2.1% down from last month’s 5.4%.

• South Korea ended lower after Samsung Electronics reported its lower net profit since 2011, with the company’s outlook for 2024 suggesting some continued ‘selective production adjustment’ of memory chips in H1.

• China is initiating its largest-ever reorganization in the banking sector by combining numerous rural banks into sizable regional entities, in response to increasing indicators of financial strain. Since 2022, the country has facilitated the amalgamation of rural cooperatives and rural commercial banks across at least seven provinces. With the management of risks within the $6.7 trillion sector identified as a primary focus for the current year, it signals the anticipation of further consolidation efforts ahead.

Europe, the Middle East, and Africa

• European indices opened generally higher but took on a downward bias after the first hours of trading; better-performing sectors include real estate and financials; while sectors inclined to the downside include consumer discretionary and technology; The apparel subsector was dragged by disappointing results from H&M.

• Lower-than-expected inflation from France dropped Euro and bond yields on the belief that it reinforces a clear path of rate cuts for the ECB this year. **

• Germany’s retail sales data came in sharply lower at -1.6% MoM down from -0.8% MoM. YoY Retail sales remained stable at -1.7%. As the market awaits inflation data, we’ve already received regional inflation data and the largest regions in Germany are reporting a deceleration in YoY inflation overall.

• Saudi Arabia’s GDP growth came in lower for yet another quarter at -3.7% YoY in Q4 vs. -4.4% YoY in Q3. As before, GDP growth was dragged lower by the drop in oil production coming in at -16.4% YoY, slightly better than last quarter’s drop of -17% YoY.

• UK housing prices are going up again. The Nationwide House Price Index in the United Kingdom fell -0.2% YoY in January 2024, easing from a -1.8% drop in the previous month. MoM prices went up +0.7%.

The Americas

• Brazil's unemployment rate dropped further to 7.4% in the fourth quarter of 2023, down from 7.7% in the previous three-month period, falling short of the market expectation of 7.6%. This marked the lowest rate in the three months through February 2015.

• Google beat estimates but ad revenue came in lower than analyst estimates. YouTube revenues fell short. Microsoft beat estimates but came in light on quarterly revenue growth. Didn't comment on the number of customers acquired in co-pilot. AMD’s earnings came in line, while Revenues came in marginally higher but, guidance was light.

Going forward, I think what we will see is that if these earnings don't come out perfect, we will see the company's share price fall because of all the expectations and because of how much the share prices have gone up. I think people will start to adjust expectations for big tech earnings from here on out.

Chart of the Day - Microsoft Earnings

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)