U.S. Indices (SPX +0.2%, NDX flat, DJIA +0.3%, RUT -0.5%) were mixed on Wednesday, as were sectors, with the small-cap Russell 2000 the clear underperformer. Health and Consumer Staples were the relative outperformers, while Communication Services, Energy, and Health all sit in the red. Risk sentiment was initially hit in the European morning, on a couple of factors; firstly it was by weakness in the fixed income space, led by U.K. Gilts plummeting, before being further weighed on by CNN sources noting President-elect Trump is reportedly considering a national economic emergency declaration to allow for new tariff programme. However, as the US day progressed Treasuries and stocks managed to pare most of the losses in a choppy session. After T-Notes were hit by the aforementioned Gilts, they were seemingly supported by a dovish Waller who supports further rate cuts this year and noted he does not expect tariffs to produce persistent inflation and thus is not likely to influence views on appropriate monpol. US 30 Year Treasury Auction was solid and the best US auction of the week, before the latest FOMC Minutes which unveiled little new but largely paved the way for a January pause. In wake of the Minutes, the Dollar pared some of its gains which provided impetus to stocks and T-Notes, with the latter hitting intra-day highs, although the former swiftly pared any strength. On the data docket, ADP and Initial Jobless claims both printed way under expectations. The Dollar is stronger to the detriment of all G10 FX peers, while unsurprisingly Sterling lags with Gilts hit hard. The crude complex was lower on Wednesday and fell foul to the Dollar bid and broader risk-off sentiment, as opposed to anything energy specific. In the latest FOMC Minutes, which surrounded the December meeting whereby the central bank cut by 25 basis points, with one hawkish dissenter, they noted participants indicated the Fed was at or near the point at which would be appropriate to slow the pace of easing. Moving forward, participants indicated if data came in about as expected, it would be appropriate to continue to move gradually toward a more neutral policy stance. On the magnitude of the cut in December, the vast majority saw it as appropriate to lower the target range by 25 basis points, while some noted there was merit in keeping rates unchanged, citing the higher risk of persistently elevated inflation. As a reminder, Hammack was the sole voting dissenter, but the dot plot suggests there were at least four members who wanted to keep rates on hold. In addition, many observed that the current high degree of uncertainty made it appropriate for the Committee to take a gradual approach as it moved toward a neutral policy stance. A “majority” of participants thought the decision to ease policy in December was “finely balanced” and many participants suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters. On the incoming President-elect Trump’s admin, a number of participants indicated they had Incorporated ‘placeholder assumptions’ regarding potential trade and immigration policy changes into their projections. Again reminding, at the December Powell press conference, the Chair highlighted that some incorporated policy changes into their projections, but others did not. Further, Fed staff projected slightly lower GDP growth and ‘a bit’ higher unemployment rate than the previous baseline forecast after incorporating recent data and placeholder assumptions of potential policy changes from the incoming administration. Lastly, and on the inflation footing, almost all participants judged that upside risks to the inflation outlook had increased. As reasons for this judgment, participants cited recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy. Fed Member Waller said inflation will continue to make progress towards the 2% goal and that he will support further cuts in 2025, however, the pace of cuts will depend on further inflation progress. He acknowledged recent inflation progress has been slow, but the higher inflation readings from early in 2024 will begin to drop out of inflation numbers in January. This should result in a significant step-down in the 12-month inflation numbers through March. The influential Governor added that the economy is on a solid footing overall, and there is nothing to suggest the labour market will weaken dramatically in the coming months. Looking ahead, and referencing the upcoming Trump administration, Waller does not expect tariffs to produce persistent inflation and thus not likely to influence views on appropriate monetary policy. Later in the Q&A section, Waller said he does not think the Draconian tariffs will be implemented and he does not think there will be a huge impact on inflation from tariffs in the near term. Moreover, Waller stated long-term yields may have more of an inflation premium, but the Fed will fix that, and US deficits may also be driving long-term yields higher. Elsewhere, Oil closed 1.2% lower on Wednesday while Gold was firm ending yesterday’s session with a gain of 0.5%.
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