Housekeeping: Good Morning.
Today
Discussion: Powell Lied
Premium: ING Fed Decision Recap
Discussion: Powell's Inflation Flip-Flop Was Political
"We have core inflation coming down to 2.5% next year, that would be significant progress."
-Powell lying to himself
Above all, don't lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others. - Fyodor Dostoevsky from The Brothers Karamazov
1- A Sudden Shift in Stance
Federal Reserve Chair Jerome Powell executed a notable shift in tone since the pre-election period, signaling a new approach during yesterday’s press conference.
“We are, though, in a new phase in the process,” Powell remarked, emphasizing the need to “move cautiously and look for progress on inflation.”
2- Rising Rate Expectations and Economic Fallout
Powell’s acknowledgment of evolving conditions coincided with a sharp rise in long-run rate expectations, now sitting at six-year highs. These levels are far removed from the Fed’s stated 2% “neutral” target, leading to broad market turmoil:
3- Dollar Strength and Asset Pain
The U.S. dollar surged, now up 4% since the election, reaching levels not seen since September 2022. This rally coincided with significant stress across other asset classes:
4- Implications for 2025 Rate Expectations
Rate expectations for the end of 2025 have surged to 4.00%, reflecting growing market skepticism about the Fed’s ability to manage inflation effectively. The persistent rise in expectations underscores concerns about Powell’s recent pivot and its potential implications for long-term economic stability.
"Yesterday's pausing tantrum in financial markets following the hawkish rate cut is probably the start of the correction we've been expecting. As we've noted lately, there have been too many bulls with unrealistic rate-cut expectations for 2025. The correction could last through January on concerns about a government shutdown, longshoremen's strike, tariffs on day one of Trump 2.0, and delayed tax-related profit taking. Ed Yardeni
Goldman Pushes Back
Second, we disagree with the view that dollar strength will halt structurally higher central bank purchases (which boosts the end-2025 gold price by 9% in our base case) because central banks tend to buy gold internationally from their dollar reserves. In fact, the large central bank buyers tend to raise their gold demand amid local currency weakness to boost confidence in their currency
Full analysis tomorrow
News/Analysis:
Equity Recap:
US equities swooned on Wednesday after Fed Chair Powell said the FOMC would be cautious about further rate cuts given stickier than expected inflation. Large caps bested small caps: S&P 500 (-2.95%) vs. Russell 2000 (-4.39%). MSCI Emerging Markets (EEM) and MSCI EAFE (EFA) dropped 2.33% and 2.45% respectively.
Market News:
"The Federal Open Market Committee cut its overnight borrowing rate to a target range of 4.25%-4.5%, back to the level where it was in December 2022. “Today was a closer call but we decided it was the right call,” Chair Jerome Powell said. The Fed indicated that it probably would only lower twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations." Source: CNBC
"Microsoft bought twice as many of Nvidia’s flagship chips as any of its largest rivals in the US and China this year, as OpenAI’s biggest investor accelerated its investment in artificial intelligence infrastructure. FT
"U.S. authorities are investigating whether a Chinese company whose popular home-internet routers have been linked to cyberattacks poses a national-security risk and are considering banning the devices. WSJ
"The US Supreme Court on Wednesday said it will hear TikTok’s appeal against a divest-or-ban law that will determine the video app’s fate in the US. FT
"The billionaire Porsche-Piëch family, Volkswagen’s majority owner, has taken a hardline stance in backing the company’s plans to close several German factories, as the threat of diminished dividends looms. FT
Politics/Geopolitics:
"Israel-Hamas hostage deal not imminent", according to Al Jazeera citing Jerusalem Post.
"IDF: Sirens sound in several areas of central Israel, including Tel Aviv", according to Sky News Arabia.
Senior Israeli official said IDF attacked in Sana'a (Yemen), according to Axios' Ravid.
Yemeni Houthi spokesperson posted "An important statement for the Yemeni armed forces in the coming hours.", via X.
"Arab media reported attacks in the area of the Yemeni capital Sana'a, the port of al-Hodeidah in the west of the country, and an oil facility in the Ras al-Issa area", according to Kann News.
"An adviser to the Houthis' information ministry in Yemen: 'The Israeli attacks will not go unanswered. We will attack facilities related to electricity and oil reservoirs deep inside the occupation entity'", via Kan's Kais on X.
Ukrainian drone attack on Russia's Rostov region starts fire at Novoshakhtinsk oil refinery, according to the regional governor.
Swedish Police say they went on board the Yi Peng 3 vessel today at the invitation of Chinese authorities
Data on Deck: FOMC/ PCE
MONDAY, DEC. 16 S&P flash U.S. services PMI
TUESDAY, DEC. 17 U.S. retail sales
WEDNESDAY, DEC. 18 Housing starts 2:00 pm FOMC rate decision/presser
THURSDAY, DEC. 19 Existing home sales
FRIDAY, DEC. 20 PCE index Nov1
Final Market Check
Premium:
