Fed Makes Long-Awaited Pivot

Federal Reserve Sign with microphones

ANNOUNCEMENT: This will be our last News letter for 2023. We wish you a joyous holiday season and best wishes for a prosperous 2024.

Global equities were sharply higher on the week, with several indices, including the Dow Jones Industrial Average, closing in record territory in recent days. The yield on the US 10-year Treasury note plunged from 4.22% last Friday to as low as 3.89% after the US Federal Reserve signaled it has begun to contemplate rate cuts in 2024. The price of a barrel of West Texas Intermediate crude oil rose a dollar to $71.70 while volatility, as measured by the Cboe Volatility Index (VIX), inched down to 12.2 from 12.8.



Canada’s inflation rate is still a ways away from the Bank of Canada’s two percent target, but continues to come down. Our consumer price index slowed to 3.1 percent year over year in October from 3.8 percent the month before. We believe Canada is now experiencing a mild recession. The unemployment rate, now at 5.7 percent, is set to rise above six percent from Canada’s rapid growth in population, but there won’t be a huge weakening in the labour market.

We are fully expecting the Bank of Canada to follow the US Fed in reducing rates starting in the second quarter of 2024. We are forecasting three 25-basis-point cuts from the central bank, which would reduce its overnight policy rate from five percent to 3.75 by the end of 2024.



The Fed has finally made the pivot. Fed Chair Jerome Powell’s remarks following Wednesday’s conclusion of the meeting of the Federal Open Market Committee—coming just two weeks after he sought to dampen expectations of a dovish pivot—opened the monetary floodgates. As expected, markets surged. Markets priced in seven rate cuts by the end of January 2025, up from five ahead of the meeting, with traders betting the first move could come in March. The combination of favorable Consumer Price Index and Producer Price Index data this week helped set the stage for the FOMC to begin discussing the timing of rate cuts at the meeting, which surprised the market. Powell said the committee was mindful of the risks of holding rates too high for too long. To avoid an inflation overshoot to the downside, Powell said the Fed would cut rates well before it reached its 2% target. FOMC members penciled in three rate cuts in 2024, up from two in their September forecasts. Stocks, bonds and commodities all rallied on the unexpectedly dovish commentary.



The European Central Bank and the Bank of England met on Thursday, the day after the Fed did, but they were much more cautious in their commentary after each held rates steady. This was expected as the ECB is well behind the US and Canada in fighting inflation. The ECB announced it will reduce its reinvestment of maturing principal payments within its Pandemic Emergency Purchase Program in the second half of 2024, which will have the effect of tightening monetary policy. In contrast to the Fed, ECB President Christine Lagarde said the Monetary Policy Committee did not discuss rate cuts. Earlier Thursday, the BOE forcefully pushed back against the notion of an early dovish pivot as three of the nine members of the MPC voted to hike rates. BOE Governor Andrew Bailey said that while he is encouraged by the improved outlook on inflation, he is concerned by its persistence. After the central bank meetings, the euro and pound both rallied strongly versus the dollar in anticipation of narrower interest rate differentials.



Japanese Prime Minister Fumio Kishida replaced four cabinet ministers on Thursday amid a deepening scandal involving lawmakers concealing income raised at fundraising events. Prosecutors are expected to raid the homes and offices of some Liberal Democratic Party members caught up in the probe, local media reported this week. Kishida’s popularity continues to decline, polling shows, with his support slumping to just 17.1% according to a survey published Thursday.

China’s economy put in a mixed performance in November, with industrial production rising 6.6% year over year, beating estimates. Retail sales, however, rose 10.1% over the same period, falling substantially short of expectations. Residential property sales fell 4.3% compared with a year ago while new home prices slumped for the sixth straight month, falling 0.37% in November.



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