Stocks raced higher yesterday after the Fed kept rate policy steady with slight hints of dovishness. The Producer Price Index came in soft, a further indicator that inflation is slowing.
Ho, ho, hold on to your hats. We know that the Fed is apolitical. What about atheistic? Whatever the case, the Fed ushered in holiday spirit yesterday with what many are calling a dovish pivot. Yes, that elusive pivot I have been promising everyone that would come… eventually… but who knows exactly when. Let’s get the facts out there. First, the Fed kept rates steady, which was broadly expected. Second, in their highly edited statement, Fed officials added the word “any” in front of “additional policy firming,” which implies – if you are a bull – that the Fed is kind-of done. Powell confirmed as much in his press conference. Now we know that the Fed did not use ChatGPT to write its policy statement, carefully handcrafting every syllable of every word to keep all options on the table.
If you think that it’s a bit odd and you are unwilling to make investment decisions based on one 2-syllable, 3 letter word, I am with you. However, we can’t unsee what the Fed put out there, purposely. Let’s take it a step further. Why don’t we just ask Fed members where they expect rates to go next. Better yet, let’s ask every one of them and then calculate a median of their projections. They are, after all, the people that set those rates. Wait, we don’t have to go through that trouble, because the Fed has done it for us… already, by sharing the Dot Plot. Check it out and then keep reading for an explanation.
Ok, now pay attention, I am going to go quickly. Focus on the gray open circle versus the green open circle. The gray one is the average projection from back in September and the green from yesterday. Zero in on 2024 and you will notice that the Fed lowered its year-end projection for Fed Funds from just above 5% to just about 4.5%. Oh, and by the way, Fed Funds are at 5.5% now, so Fed policy makers were already expecting to cut by -50 basis points back in September, but now they are projecting three to four 25 basis-point cuts. That’s right, cuts. Let’s not get into all the little solid dots, which are individual member projections, but do notice that at least 1 member thinks that rates will remain right here, and conversely at least 1 member thinks that rates will be below 4%. What is important is that the majority of dots are evenly distributed around that median around 4.5%.
So that’s the big news, but there is something else worth noting on the chart. I know that the chart is busy but try to focus on the white line at the bottom of the chart. I have drawn in an orange arrow to help you realize where Fed Funds futures expect rates to be by the end of 2024. You don’t have to squint; I will just tell you that futures are expecting 3.75% as of this morning. That is 1.75 percentage points lower than where the target stands today.
Clearly there is a discrepancy between where the market thinks rates are going to be and where Fed governors… um, people with their feet on the clutch… think they will be. My friends, that is how markets are made. Regardless of who you believe or how you interpret the word “any”, all roads seem to be pointing to lower rates by the end of next year. The big question now is just how bumpy the road will be between here and there. I can tell you one thing; the equity and bond markets are interpreting yesterday's news as the landing lights on full bright for Santa Claus to land his sleigh.
WHAT’S LINING UP THIS MORNING
Adobe Inc (ADBE) shares are lower by -3.34% after the company announced that it beat EPS and Revenue estimates by +3.17% and +0.61% respectively last quarter. The company gave full-year guidance that was below analyst expectations prompting questions of when AI bets will pay off. The company also gave an update on its FTC investigation, stating that a settlement may occur which could have material implications on its financials and operations. Potential average analyst target upside: +1.7%.
FMC Corp (FMC) shares are lower by -0.45% in the premarket after BMO Capital lowered its rating to MARKET PERFORM, citing high inventories. The agricultural chemical company just last month lowered its FY and current quarter guidance. Dividend yield: 4.01%. Potential average analyst target upside: +17.3%.
YESTERDAY’S MARKETS
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