Hawkish Fed hints at further cooling of markets

Uncertainty in policy direction
Federal Reserve officials generally support a rate cut in 2024, according to minutes from a December Federal Open Market Committee meeting. But there is “an unusually high degree of uncertainty” about when or if the cuts will actually take place this year. Still, the market expects a rate cut of six quarter points.

A blow to the market
U.S. markets fell on Wednesday as the 10-year Treasury yield briefly exceeded the 4% mark, spooked by the December Fed meeting minutes. Asia-Pacific markets followed Wall Street in decline on Thursday. Both mainland China and Hong Kong indexes fell in December, despite a recovery in business activity in both regions. Bucking the trend, India’s Nifty 50 index rose about 0.6%.

Soft landing on the course
Richmond Fed President Thomas Barkin expressed confidence that the U.S. economy is on track for a soft landing, a scenario in which inflation subsides to below 2% without shrinking the economy. However, Barkin sees four risks to a soft landing. Unexpected shocks may occur. Inflation rate he is likely not to fall below 2%. High demand can cause prices to rise.

“Close Sesame”
Alibaba was once the crown jewel of China’s technology sector. But the company has stumbled over the past 12 months. The company announced a major restructuring in March, followed by a personnel reorganization. Alibaba canceled the much-anticipated listing of its cloud business in November. The company’s stock price has fallen 75% since 2020. Where will the company go from here?

[PRO] Cheaper than S&P
The S&P 500 rose 24% in 2023, delighting (and perhaps surprising) investors. However, it also means that the stock is valued highly from a price-earnings-per-share perspective. Still, some stocks trade at valuations cheaper than the broader S&P, and analysts expect these stocks to deliver strong earnings growth in 2024.

The US Federal Reserve has not lost its role as one of the main drivers of the market.

Last December, the Fed perhaps inadvertently stepped on the gas pedal for stocks when it announced its outlook for three rate cuts by 2024. Yesterday, minutes from that December meeting caused the stock price to plummet.

First of all, the good news. Minutes showed that Fed officials are likely to conclude a rate cut in 2024.

“Nearly all participants agreed that the baseline outlook suggests that it is appropriate to lower the target range for the federal funds rate by the end of 2024, reflecting the improved outlook for inflation,” the document said. “I showed that.”

But it’s nothing new. We already knew that from Dotplot, which was released last month.

The part that surprised the market was that “participants agreed that it would be appropriate for policy to maintain a suppressive stance for some time until inflation falls clearly and sustainably toward the Committee’s goal.” I have reconfirmed this.”

Logically speaking, it’s nothing new to the market either. “Data-dependent” has been the Fed’s favorite phrase for the past six months. And it makes sense that interest rates would only be cut when inflation recedes.

But the minutes also show an “extraordinary rise in uncertainty” about the direction of monetary policy, suggesting that even three interest rate cuts are not set in stone – although, to be fair, And the dot plot is just a prediction, not a promise.

But when you compare that sentiment to the 6 quarter point rate cut the market is expecting, it’s easy to see why the market reacted the way it did yesterday.

The S&P 500 fell 0.8%, the Dow Jones Industrial Average fell 0.76% and the Nasdaq Composite fell 1.18%, falling for the fourth day in a row. Meanwhile, the yield on 10-year government bonds briefly exceeded the 4% mark as investors worried about an unexpected rise in long-term interest rates.

Employment data will be released on Friday, and US consumer price index data will be released in just over a week. Both numbers not only determine the direction of interest rates, but also the direction of the market.

—CNBC’s Jeff Cox contributed to this report.