U.S. Indices closed lower on Monday with the Russell and NASDAQ lagging while sectors were predominantly firmer with Health Care, Utilities and Consumer Discretionary outperforming, but Tech, Energy and Communication lagged with tech still pressured after the ORCL and AVGO reports last week. Energy stocks were hit as oil prices declined on Russia/Ukraine peace progress – with talks taking place today with Ukraine, EU and the US, with all sides seemingly optimistic with President Trump suggesting they are closer than ever to peace. The pressure in crude prices gave a helping hand to T-Notes with the curve bull steepening. T-Notes hit a peak after the weak New York Fed Manufacturing survey, albeit the outlook was more optimistic. T-Notes then pared off highs into settlement. Fed speak saw Miran explain his dissent, Williams remarked Fed policy has moved toward neutral from modestly restrictive, while Collins wants more evidence of inflation returning to target before easing again. In FX, the Dollar saw mild weakness while the Japanese Yen outperformed as rate hike expectations built ahead of Friday’s decision, New Zealand Dollar lagged after the RBNZ Governor suggested that market conditions have tightened “beyond” what the RBNZ intended. The New York Fed Manufacturing Survey saw headline business conditions fall to -3.9 in December from 18.7 in November. The drop was led by a fall in new orders to 0, from 15.9, while shipments declined to -5.7 from 16.8, with unfilled orders also falling further into contractionary territory, to -14.9 from -5.8. Inventories fell slightly to 4.0 from 6.7. When looking at prices, both Paid and Received eased, falling to 37.6 from 49.0, and to 19.8 from 24.0, respectively. Employment was little changed, the number of employees ticked up slightly to 7.3 from 6.6, while the average employee workweek fell to 3.5 from 7.7. However, firms became more optimistic about the outlook. The six-month outlook for business conditions rose to 35.7 from 19.1, with new orders up to 38 from 23.3, shipments rose to 33.3 from 23.3, and unfilled orders rose to 12.9 from 1.0. Prices Paid are expected to ease, with the six-month index falling to 55.4 from 62.5, but the outlook on prices received rose to 46.3 from 41.3. The outlook for the number of employees declined slightly, to 8.8 from 11.9, while the average employee workweek rose to 12.9 from 5.8. The US NAHB Housing Market Index rose to 39 in December from 38, as widely expected. Current sales conditions rose by 1 to 4, sales expectations in the next six months increased by 1 to 52, while the traffic of prospective buyers held steady at 26. Additionally, the latest survey revealed that 40% of builders reported cutting prices in December (prev. 41%), marking the second consecutive month the share has been at 40% or higher since May 2020. Meanwhile, the average price reduction fell to 5% from 6%. The use of sales incentives was 67%, the highest percentage in the post-COVID period. Oxford Economics writes that the improvement in builders’ view of future sales is consistent with their forecast for Housing Starts to move sideways through Q4 but gradually increase in 2026 in response to lower mortgage rates and an improving economy and labour market. Fed Member Williams, in his initial remarks, said that Fed policy has moved toward neutral from modestly restrictive and monetary policy is well positioned for what lies ahead, which somewhat echoes what Chair Powell said after the rate decision that the Fed rate is in a “plausible range of neutral”, but it is “at the upper end.” Williams expects US unemployment to be 4.5% by the end of 2025, which is in line with the median projection seen in the recent Fed SEPs. In addition, Williams expects inflation to move to 2.5% in 2026 and 2% in 2027, and expects 2026 GDP growth to hit 2.25%, well above the 2025 rate. He reiterated he sees tariffs as a one-off price adjustment, not spilling over into broader inflation. In later remarks, he noted the Fed’s baseline forecast is a ‘pretty good outcome’ with recent rate cuts positioning the Fed to balance both mandates. On the labour market, added that a gradual cooling points to a modestly restrictive monetary policy. Lastly, ‘very supportive’ of the Fed’s decision to cut interest rates last week and expects the coming job data will show a gradual cooling, while it is too early to note what the Fed will need to do in January. Finally, Miran, argued that current excess inflation does not reflect underlying supply and demand dynamics, and said families are “rightly distraught” about the affordability challenges caused by past inflation. He asserted that prices are “once again stable” and that monetary policy should reflect this reality. Miran emphasised that shelter inflation, which is measured with a lag, overstates current conditions, while the rise in portfolio management fees is unrelated to underlying market forces. Stripping out housing and non-market-based components, he estimated that core PCE inflation may already be below 2.3%, effectively “within the noise” of the Fed’s 2% target. He does not believe recent goods inflation is primarily due to tariffs, though he acknowledged not having a complete explanation. Miran added that while goods inflation may now be structurally higher than before the pandemic, this could be more than offset by ongoing housing disinflation. He warned that if the expected decline in shelter inflation fails to materialise, the overall inflation outlook could change. For now, he sees no evidence of concern in inflation expectations data and maintains that there is no excess underlying inflation relative to the Fed’s target. He repeated that keeping policy too tight risks unnecessary job losses and affirmed that the labor market shows no signs of severe stress. He believes the Fed’s current policy stance is too tight and continues to contribute to housing affordability problems, in part due to past efforts to inject credit into the housing market. While he prefers an all-Treasury balance sheet, he opposes MBS sales due to the potential for realised losses and broader negative consequences that outweigh balance sheet purity. Finally, he said he anticipates remaining in his current seat until a replacement is confirmed and that President Trump has not spoken to him about the Fed seat or policy direction. Elsewhere, Oil closed lower by 1.5% while Gold was flat following a volatile session.
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