Fed’s Dot Plot Shock
This week started with a miss in the US CPI data setting hopes for a dovish Fed meeting on Wednesday. However, on Wednesday the Fed’s dot plot projections showed the Fed remains committed to getting on top of US inflation and that a higher rate above 5% may be ahead for 2023. This sent the USD higher, gold lower, and stocks lower. On Thursday the Bank of England’s decision was mixed with a dovish vote split of 7-2, but the BoE no longer sees the current money market pricing as too aggressive, which was more hawkish.
Other key events from the past week
- * USD: US CPI drops, Dec 13: Headline US inflation came in at 7.1% y/y below the 7.3% forecast and minimum expectations of 7.2%. This sent the S&P500 higher, USDJPY lower, and precious metals higher before the Fed meeting.
- * USD: Interest Rate decision, Dec 14: The rate statement took a hawkish outlook with the dot plot median rate for 2023 seen as 5.1% and no rate cuts projected until 2024. However, the bond market did not react in a way that it showed agreement with the Fed’s outlook. A bumpy road ahead for stocks!
- * GBP: Bank of England, Dec 15: The Bank of England’s decision was mixed with a dovish vote split, but a growing acceptance of the market’s pricing for a 4.50% terminal rate next summer. The hawkish Fed decision may help keep the GBPUSD pressured in the near term, but the inflation battle is far from won.
Key events for the coming week
- * USD: Consumer confidence, Dec 21: US consumer confidence is forecast by economists to fall to 100 next week down from 100.2 prior. Watch for any big dips in consumer confidence, 98 or below, to potentially weaken US stocks.
- * Strong gold seasonals ahead: Gold’s seasonals are great this time of year.
- * USD: Inflation focus, Dec 23: The last core PCE print came in firm at 5%. Will we start to see PCE, the Fed’s preferred measure of inflation, fall more dramatically? Expect the path of inflation to continue to impact how aggressive the Fed will need to be on its rate path next year.
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