Macro Economy Weekly | Bitmidas
2023–12–6
Hawkish as it is, the market cannot resist interest rate cut expectations
The Fed’s mixed opinions, Daly, Powell, and others have dampened expectations of interest rate cuts, but the Fed’s Economic Beige Book shows that economic activity is slowing down. Inflation in various regions has been generally eased, PCE is declining, and the U.S. Treasury Secretary believes that there is no need to raise interest rates and is expected to cut interest rates in advance…
Important Data of the Week
The Dallas Fed Business Activity Index in the United States in November recorded -19.9, lower than the previous value of -19.2 and the market forecast of -16, which is within the recession range defined by the index for the manufacturing industry.
The final value of the Markit manufacturing PMI in the United States in November was recorded at 49.4, the same as the previous value, and lower than the expected 49.5. The ISM manufacturing PMI in the United States in November was recorded at 46.7, the same as the previous value, and lower than the expected 47.6. It is still under the threshold, and consistent with the business index.
The revised annualized quarterly rate of real GDP in the United States in the third quarter was 5.2%, exceeding market forecasts of 5.0%, indicating that the overall U.S. economy remains resilient.
The U.S. core PCE annual rate in October was in line with expectations at 3.5%, lower than the previous value of 3.7% and the lowest since April 2021. The core PCE price index recorded a monthly rate of 0.2% in October, lower than the previous value of 0.3%, in line with market forecasts. The overall price index maintains a downward trend.
From a sub-item perspective, core services, especially entertainment services, transportation services, catering and accommodation, and other service industries, have dropped significantly, which may be affected by the ebb of the summer consumption peak; core commodities have improved slightly; the drop in retail gasoline prices has driven down the energy inflation; the food sub-item declined slightly. PCE inflation in October was consistent with the information reflected in the previously released CPI.
The U.S. personal expenditure rate recorded 0.2% in October, lower than the previous value of 0.7 and in line with market expectations of 0.2%. Looking at the breakdown, actual personal consumption expenditure in October was overall lower than the previous value and in line with expectations, but some data were slightly higher than the previous value, showing that consumption still has a certain degree of resilience.
The initial annual CPI in the Eurozone in November was 2.4%, lower than the previous value of 2.9%, and the market forecast of 2.7%.
The Eurozone’s November CPI monthly rate recorded -0.5%, lower than the previous value of 0.1%, and market forecasts of -0.2%.
The Eurozone unemployment rate recorded 6.5% in October, and the unemployment rate has remained relatively stable at 6.5% on average since May 2022
The hawkish officials of the Federal Reserve remain cautious, but the PCE data has declined and the Economic Beige Book has slowed down overall. There is little disruption to the probability of an early interest rate cut in 2024. The probability of an interest rate cut in March 2024 has increased to 55.1%.
Federal Reserve Balance Sheet
Federal Reserve officials stated that the Fed’s balance sheet may be carried out independently of interest rates and will continue to shrink its balance sheet and reduce to 7,796,145 ($M) dollars.
Recession Indicators-U.S. Debt Inversion
PCE declined, economic activities cooled, inflation eased in many regions, interest rate cut expectations increased, and U.S. bond yields rebounded sharply. The 10-year bond yield fell by at least 4.1975%, and the 2/10 inversion converged to 34.5 bp.
Market Performance
The PCE declined, economic activities cooled, inflation eased in many regions, and interest rate cut expectations increased, suppressing the US dollar. The US dollar index reached the key support area of 102.160 and then rebounded weakly to 103. If it breaks 102.160, it will easily accelerate towards 100~98.
Expectations for interest rate cuts have increased, and the weakening of the U.S. dollar is bullish for gold. After gold exceeded $2,000, it continued to move strongly, and the main contract reached a high of 2095.7 and closed at 2091.9, setting a new historical high.
Expectations of interest rate cuts have increased, U.S. bond yields have fallen sharply, and the pressure on U.S. stocks has weakened. The S&P 500 continues to run on the strong side, heading towards 4700 and continuing an uptrend.
BTC continued the rally towards 46k. See our daily post on BTC on X platform at @Bitmidas.
Summary
Although U.S. GDP exceeded expectations, overall economic activity was slowing, especially in the manufacturing sector. U.S. core PCE inflation in October continued to decline as expected, and actual personal consumption expenditure slowed, proving that current interest rates are sufficiently restrictive. Although some Fed officials are hawkish, for example, Daley still reserves interest rate hike possibilities, and Powell also suppressed interest rate cut expectations, most officials have turned to a dovish tone. U.S. Treasury Secretary Yellen stated that she does not believe that further radical monetary tightening is needed, and the overall market expectations for an interest rate cut are increasing.
Employment, wages, and savings rates all indicate that consumption cooled in the fourth quarter; the U.S. job market in October continued to cool down, and economic activity weakened; inflation in the Eurozone continued to decline, and global financial tightening and slowing economic activity accelerated inflation. At this stage, an early interest rate cut is still a high-probability scenario. The Fed's hawkish stance failed to change the market’s expectations for an early interest rate cut. The probability of an interest rate cut in March 2024 has surged to 55.1%.
Completion of this report: 2023–1202–11:15 (UTC+8)
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