Are Rate Cuts Coming in 2024? Breaking Down this Week's Big Fed Announcement

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This week we delve into the intricate dynamics of global markets and the impact of the Federal Reserve's decisions on economic shifts worldwide. Chris is back to dissect the recent tumultuous events in the public equity and bond markets. Our discussion centers on the significant shift in the Federal Reserve's stance, moving from a pessimistic outlook, indicating rate increases and economic slowdown, to a more lenient approach.

We touch on the potential intersection of political influence and economic policy, suggesting a plausible strategic move by the current administration for a rate cut in line with the election cycle. Also discussing the global repercussions of these market movements, with the US setting the tone for Western economies while affecting currency values and commodity prices worldwide.

We emphasize the complexity and interconnectedness of global economic systems, shedding light on how decisions made by the Federal Reserve reverberate across various regions and markets.

As usual, big thanks to Chris for taking the time to share his insights!

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TRANSCRIPT (this is an automated transcript):

MPD: Welcome, everybody. I'm Mark Peter Davis, managing partner of interplay. I'm on a mission to help entrepreneurs advance society. And this podcast is definitively part of that effort. Today, we've got a conversation with Chris. This has been a tumultuous week in the public equity and bond markets. A lot of the reaction stems from the way the Fed has changed its tune.Moving from this pessimistic raising rates slowing down the economy vibes. And shifting into something a little softer. We get into why that's happening and what it means. I hope you enjoy.Hey, Chris, you're in the UK, right?

Chris: I am. I'm five hours ahead of you. And just like I am in life, usually, I'm kidding. Are you in London proper? I am in Chelsea two blocks away from the river and. Very beautiful residential neighborhood. I

MPD: don't know London that well, we're going to go check it out summer of 24, but I've only been once and it was a blur.Many years ago,

Chris: I'm going to put it on live here that we need a London office.

MPD: It's interesting because I know you're in London and you just called it vacation, but you're working New York hours. So your idea of vacation is flawed. We have to work on that. So what's the it's 5 hours difference.So what hours

Chris: are you keeping? Yeah, I'm I go about 3 a. m. and wake up at 10 a. m. local time. So that's. 5 a. m. New York uh, yeah, I don't even know I'm losing track, but yes, like New York, full New York hours, my team's in New York and have to do this, but I just enjoy, I actually enjoy working. I know I'm a workaholic, but I am, I enjoy working on vacation because it gave me a sense of security and serenity.I feel like I'm getting ahead without anyone knowing, and that's awesome. I'm a competitive person. What can you say?

MPD: Sadly, I feel the same way. I understand you. All right. No one wants to hear about this. Let's talk about the markets. Yeah. So what's happening today, because this week has been a little

Chris: wild.Yeah it's funny because we have these recordings on days that are just crazy volatile and today's happens to be one of those. I remember we still have, we have one of our early recording this year on when SVB collapsed on the same day. And today is not of the same scale, but close. One of those days that market as a whole experience a two to three standard deviation move across interest rates and equity.What happened? FOMC. So we had the last FOMC meeting of the year. Everyone was holding their breath, waiting for a pal to come out and say something, because the last minutes that came out. Can you

MPD: remember to define FOMC?

Chris: For the mere humans. Oh, that's the interest rate.That's what I've been talking about for quite a while now is it's the meeting where the federal officials come together and set interest rates and not just set current interest rates, but also provide future interest rate expectations. And yeah, so what happened today was uh, long story short, we had in the minutes that came out about a month ago, that fundamentally shifted the tone of the Fed up until that point.They were incredibly. Meaning they're everything they say, it seems to say that data is not there yet. We need to continue to hike about a month ago when their statements got released. The tone shifted towards dovish, meaning they're now finally saying, oh, there's a chance we're actually going to hold and potentially cut.Okay. But nothing was confirmed until really a full and full MC comes around, which is today. And today, the gist of it is they did hold rate steady, which was that was not the part that moved the market. Everyone expected that. It's the sort of the statements, the comments that came afterwards. I'm just going to quote a few things that the Fed official that pouch chairman Powell said.The biggest thing he said was further rate hikes. Quote, unquote, not likely, but the possibility of hike is not off the table and activity in the housing market has flattened out after picking up over the summer. And data suggests that highest, the higher rates are slowing business investment and us economy overall is losing steam in the final month of the year.Okay. So those are the key comments. If you are following what power has been saying for the past 2 years, and, looking for keywords here and there, this is the very 1st time you not likely when it refers to really high future further rehearsal. So this was taken as a massive win by equity investors.People who are betting on the beta of the market to the overall economy to equity market to rally, because this was taken as a confirmation that there's there will not be any future rate hikes. Leading up to this point, the futures market was already pricing in no rate hikes, but at least next year, people's expectations were somewhat conservative, meaning, there might be one cut and there might be by the end of the year, two cuts.Okay. Three, some, if you're really dovish. At this point, after today's meeting, everything just got blown out of proportion. So if you now stare at the industry market, the market that sort of or futures market on interest rates, the market that predicts what might happen next year in interest rates.Now, the market is pricing in a 50 percent chance of a cut in March. That's in 3 months from now. And a full cut in April, 2 cuts by May, 3 cuts by July, 5 cuts of 25 days by each by 2024. So that brings us down all the way from what's currently 5. 25 percent to 5. 5 percent from an interest rate all the way down to 4%.By the end of next year in the next 4 months so, that is drastic move and that is not to be completely clear. That is not what the Fed official said. Okay, their median dot plot and what indicated is still very much behind what the market is pricing. So the market is leading the way here, and they think that at some point in the future, some federal official will come out and readjust their statement even more. So it's a crazy sort of dichotomy here and move movement in 1 day. And if you just extend that to the further part of the curve, the longer part of the curve, the two year, two year treasury, just trade it down. So it rallied right on price, but yield went down by 30 basis points in one day, 10 year went down by 18 basis points.So now 10 years now back to 4%, just about a month and a half ago, we're at 5 percent a hundred basis point move on a 10 year in about 45 days. Again, this is the last time we saw something like this was really beginning of the cycle. So nothing like it for a while. tHat's just the interesting market equity market responded in a similar fashion, slightly less dramatic S& P finished at 4700, which is, I think, about 1.5 percent away from all time high. Okay. We're about a month ago. We're talking about potentially hitting 4, 000. Now it's back to close to 5, 000 nasdaq still a little about eight and a half, 9 percent away, which makes sense. The tech led the sell off and it's leading the rally this year, but not where we were.That's what sort of happened, right? Sorry for the long narrative, but that's what happened over on the market. Crazy stuff in one day and fundamental shift in multiple ways. I had

MPD: heard someone talking to me recently, I talked to a lot of interesting people with different perspectives.sOmeone said to me that Biden is going to push through strategically a rate cut in Q1 because it takes about six months for that to ripple through the market and for the main street person to feel it. And that's good timing for the next election. So that everyone's feeling wealthy when they go into the ballot box.Is that causality? Is that logic? Does that hold with you? I heard that and I was like, it sounds smart. Sounds

Chris: plausible. Yeah. Look, the Fed is supposed to be independent and the power has come out and set stated this multiple times publicly that they do not respond to political pressure.But if you ask me, everyone's human and it's almost impossible to shelter yourself away from politics when you're living in Washington, when you're living and breathing the air in Washington and having politician breathing down your neck left and right. So I would not, I would personally, my personal opinion, I would not rule out the sort of, part of this push came from.The current political party, uh, but at the same time they are adjusting to data, right? They can't make this type of move without the data support. So data is trending that way. Like I was just looking at BPI, right? The producer price index, that's a leading indicator for CPI, which is a consumer side.It came out much weaker than expected about a week ago, right? We're at 0. 9 percent year on year already. Remember feds target is 2 percent inflation, right? Of course measured by different things called PC. But roughly, if you're seeing PPI at below 1 percent on a year on year adjusted basis, you can expect CPI to come towards that in some time in the future.So data is moving that way. Inquiries coming down as we've been talking about, but the other mixed signals right now, it's not, you're all uniform. So labor markets is still insanely strong. We're at 3. 7 percent unemployment rate and sales, retail sales and earnings. Are still rising, although around the same rate as inflation, but when inflation comes further down and your wage continues to increase at the same sort of same or higher rate, your spending power goes higher, right?So that then feeds back to more inflation. So there's some mixed signals in the market where it says this whole drama of inflation is not necessarily over as of yet. But the overall broader picture is trending that way. So the Fed has to act in court in accordance with data because that's just too readily available.Everyone's scrutinizing them over this. But on top of it, if you have a political party, the sitting president telling you, Hey, you better, if you can lean one way, it makes sense that they are coming out with, more diverse statements on the back of all of that. So yeah, definitely the possibility of it.No, we're talking about America

MPD: here. And the world is wildly connected. I was in Dubai a couple of weeks ago. And the financial conversation was about what the U. S. Fed is doing, around the world. What is what does this movement in the market mean for other countries? Any particular significance?You're a third way around the world right now. What's, how does, why does this matter

Chris: for everyone else? Funny you ask because, The US is definitely setting the tones for the Western part, Western world, like overall, right? So likely you will see if you are, we've already seen this, right?So Canada, UK, European Union, like countries that are have closed highs trade relationship to the US, uh, which are experiencing similar, maybe slightly delayed inflationary pressure throughout this whole cycle is now all on pause in terms of hiking rates. So you guys are setting the way there, but definitely ahead of the pack.But if you go to the little further if you go all the way to East Asia, go to China, which has been experiencing deflationary pressure in the past few months, right? Not just this inflation. They're actually negative. The price level is actually going down, not slowing down, but go, but actually going down.And that's been happening for the past. Actually, on this one was six months now, right? For the past six months every sort of months data came out basically deflationary.And all these sort of, and that's, I don't want to get into that. That's a whole long conversation, but it's a lot has to do with the aging population, so slow recovery from covid and a bit of a lagging effect on morale and on with all the political movements that happen. And such sort of slow or sometimes in some cases, very drastic and something very slow adjustment in policy for instance, in real estate, which completely just collapsed during the, during COVID anyway so China's going the other way.Us is relatively speaking, it's actually healthier on an overall economy basis by setting the tone for the Western world in terms of pausing rate hikes. And all these things, right? Ultimately come down to the impact on currency and commodity prices. Currency, if just interest rate parity for those of you who have heard it, but basically interest rate is one of the most fundamental drivers in currency value.And when interest, when a currency has low interest rate, you basically attract less investment, less foreign investments. Therefore, the value of the currency generally goes down, right? So that's just an interest rate parity. You can basically predict that the bull market in U. S. dollars just from a trading perspective, not from a fundamental perspective, is going down in the short term because of the fact that we're leading the way in the Western world in terms of industry costs.aNd that's again, secondary to tertiary impacts in commodity prices, oil, gas, these things that are heavily involved also in the wars that are happening around the globe. Yeah, a lot of implications that we're not going to dive into, but I encourage folks to really spend some time digesting the information.Very cool. Pleasure as always.

MPD: Thank you so

Chris: much, Chris. Of course. Have a good one. Talk to you soon, Mark. And quick

MPD: reminder for everybody. Chris is an SEC registered REA, nothing he said today should be misconstrued as investment advice.All right, everyone, as always, Chris is coming in hot at least it wasn't bad news. The market's up in a lot of ways but complexities abound. I'm looking forward to talking to him in a future episode, not quite yet, about what's going to happen as a byproduct of the new president in Argentina, that guy's just getting started up.And I have a feeling that's going to drive more demand for the dollar, uh, and there might be some interesting implications though, more to come, lots more to dig into. I hope you're well, and we'll catch you next week.

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