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Deutsche Bank is out with a note on yesterday’s FOMC meeting and they highlighted a significant shift in tone. While the Fed delivered a 25 basis point rate cut, bringing the federal funds rate to 4-1/4 to 4-1/2 percent, the bank’s analysts note that the overall tone was more hawkish than anticipated.

The median inflation projection for 2025 rising to 2.5% (which they called “dramatic”) is the main shift with the Fed not expecting inflation to return to its 2% target until 2027. This more pessimistic inflation outlook was accompanied by a change in the Fed’s forward guidance language, with officials now “considering the extent and timing of additional adjustments” rather than signaling clear future cuts.

The bank’s analysts point out that Fed Chair Powell described the December rate cut decision as a “closer call,” which was underscored by a dissent from Cleveland Fed President Hammack. Looking ahead, Deutsche Bank maintains its view that the Fed is likely to skip rate adjustments in January, potentially leading to an extended pause in 2025. The bank expects the federal funds rate to remain above 4% next year, with their base case scenario showing no additional reductions.

Today’s meeting reinforced our baseline view that a skip at the January
meeting could turn into an extended pause in 2025. We continue to view the
nominal neutral rate around 3.75% and a need for the Committee to stay
restrictive relative to that level. As such, we reiterate our view that the fed
funds rate is likely to remain above 4% next year, with a base case of no
additional reductions.

The report also notes that some Fed participants have begun incorporating potential economic effects of President-elect Trump’s policies into their forecasts, which may have contributed to the higher inflation projections for 2025 and 2026. On the labor market front, Powell characterized it as solid but indicated that current job creation levels are below what would be needed to maintain stable unemployment rates.

This article was written by Adam Button at www.forexlive.com.

The rate on the 30-year mortgage in the US from Freddie Mac rose to 6.72% in the current week from 6.60% last week. That is still below the high from November which reached 6.84%.

The high for the year was 7.22% reached on May 2, 2024.

In other housing data today, existing home sales rose to 4.15M annualized pace from 3.96M in the prior month. Although a welcome relief from the lows of last month, the sales pace remains more to the lows of the sales trends going back in time.

This article was written by Greg Michalowski at www.forexlive.com.

Canadian Prime Minister Justin Trudeau is in a real battle for his political life and it looks like the clock is running out. I’d expect an election to be called in February but it’s going to try to get by with a new cabinet.

Finance Minister Chrystia Freeland quit cabinet this week, setting off some real drama. It looks like he’s going to try to surround himself with loyalists to right the ship but I’d expect the next round of polls to be even worse.

This article was written by Adam Button at www.forexlive.com.

It was something of a ‘catch up’ trade day for Europe as all the pain in US stocks yesterday took place after the European close. Despite that, it wasn’t that bad which is something of a win. Unfortunately though, European energy prices are soaring again and Germany’s auto manufacturing industry is being overrun by China.

Closing changes:

• Stoxx 600 -1.5%
• German DAX -1.2%
• France CAC -1.2%
• UK FTSE 100 -1.2%
• Spain IBEX -1.5%
• Italy’s FTSE MIB -1.7%

This article was written by Adam Button at www.forexlive.com.

I mean, he’s kind of giving up the playbook here, no?

Democrats still control the Senate so they can toss him this grenade. It would also be very difficult for many Republicans to vote to eliminate the debt ceiling.

Overall though, I think markets should feel better about what Trump’s real priority is after seeing this. If he wants the debt limit gone, it’s not because he’s planning to be a real fiscal hawk. He’s trying to get some kind of cover for the elimination of the debt ceiling under Biden so he can run up deficits.

This article was written by Adam Button at www.forexlive.com.

The pound is flirting with the lows of the day and the lows of the month as the US dollar broadly strengthens.

This four-hour chart is looking like a head-and-shoulders that would target 1.23 or at least the November lows.

The Bank of England vote today was more-dovish than anticipated but the market is still only pricing in 54 bps in easing next year. I think the UK CPI reports in the months ahead will be some of the most market-moving of any global economic data released next year. There is a real concern about inflation at the BOE but if that fades, then they have lots of room to cut, and fast.

The latest move though is mostly about the dollar as it strengthens due to middling bounce back from risk assets. The dollar is also getting heavy bids via USD/JPY which is absolutely soaring today after the BOJ left rates on hold.

This article was written by Adam Button at www.forexlive.com.

US President-elect Donald Trump has expressed four priorities for his time in the White House:

1. Strong GDP growth
2. Lower fiscal deficits
3. Improved trade deficits
4. A higher stock market

The problem is that you can’t have all those things. One way that Scott Bessant might be mulling is via a weaker dollar but that doesn’t look like it’s coming any time soon.

So you have to decide which one Trump prioritizes.

Since election night, that’s been an easy call for nearly everyone: The stock market. The sense was that Trump couldn’t stomach the pain of a real fiscal or trade fight because of what it would do to stocks.

So the sense was that deficits would stay high or maybe go even higher with a corporate tax cut and stocks would continue to rise.

That might not be the case. All the blame for Wednesday’s market meltdown is being directed at the Federal Reserve but I think that’s a mistake. The other big event on the day was that the Congressional stop-gap funding bill fell apart.

Leading the charge to kill it was Elon Musk, who has been Trump’s right-hand man since election night.

So while Trump’s priority might be the stock market, Musk appears to really believe he can slay government spending and is directing the whole weight of his $44 billion Twitter buy-out towards it.

If Musk continues to dominate Congress, then it might put the fiscal hawks in control.

Now ultimately, I think Trump tires of falling stocks and dumps Musk but it will be important to watch what happens in the spending package next and see how Republicans handle their narrow Congressional majority. If the stock market isn’t Trump’s top priority then there will be major pain to come.

This article was written by Adam Button at www.forexlive.com.

Bloomberg reports that the G7 is considering hardening the price cap on Russian oil and is even considering replacing the mechanism with a full ban on handling Russian crude.

The market may get excited about this but I don’t think it’s a real threat.

“Options under consideration range from essentially replacing the
mechanism with a full ban on handling Russian crude to lowering the
price threshold from the current $60 to about $40, the people said. The
people, who spoke on condition of anonymity to discuss sensitive talks,
cautioned that discussions were ongoing and there’s no consensus yet on a
next step.”

So far the price cap has been a near-total failure with Russian oil flowing freely.

This article was written by Adam Button at www.forexlive.com.

• Prior was 3.96m
• Sales % vs +3.4% prior
• Sales -4.2% vs +2.9% y/y prior
• Inventory vs 4.2 months prior
• Median prices $ vs $407,200 prior
• Prices +% vs +4.0% y/y prior

US 30-year mortgage rates are flirting with 7% again and that’s not a good sign for the housing market.

This article was written by Adam Button at www.forexlive.com.

S&P 500 futures are up 0.8% and Russell 2000 futures are up 1%.

Both of those moves only recover a small portion of the rout yesterday and they look vulnerable to further selling especially with 10-year yields breaking the November highs.

It’s certainly a gut-check day and I think price action will reveal where the strong hands are located.

This article was written by Adam Button at www.forexlive.com.

• Prior was -5.5
• New orders: -4.3 vs +8.9 prior
• Shipments: -1.9 vs +4.5 prior
• Unfilled orders: +18.9 vs +6.8 prior
• Delivery times: +11.6 vs -2.1 prior
• Inventories: -2.3 vs +5.4 prior
• Prices paid: +31.2 vs +26.6 prior
• Prices received: +7.3 vs +14.3 prior
• Employment: +6.6 vs +8.6 prior
• Average workweek: -8.2 vs +17.4 prior
• Six month index +30.7 vs +56.6 prior

Responses to the December Manufacturing Business
Outlook Survey suggest a decline overall in regional
manufacturing activity this month. The indicator for current
activity remained negative, while the new orders and
shipments indexes declined and turned negative. On
balance, the firms indicated an increase in employment and
continued to report increases in prices. The survey’s broad
indicators for future activity continue to suggest widespread
expectations for growth over the next six months.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• Advance Q3 reading was +2.8% annualized
• Second estimate was +2.8% annualized
• Final Q2 reading was +3.0% annualized

Details:

• Consumer spending +2.8% vs +3.5% second reading
• Consumer spending on durables +7.6% vs +8.1% second reading
• GDP final sales +3.3% vs +3.0% second reading
• GDP deflator +1.9% vs +1.9% second reading
• Core PCE +2.2% vs +2.1% second reading
• Corporate profits after tax -0.4% vs 0.0% second reading
• Business investment (nonresidential fixed investment) +4.0%

Contributors and subtractors to growth:

• Consumption: +2.48 pp vs +2.37 pp second reading
• Government: +0.86 pp vs +0.83 pp second reading
• Net International trade: -0.43 pp vs -0.57 pp second reading
• Inventories: -0.22 pp vs -0.11 pp second reading

This article was written by Adam Button at www.forexlive.com.