Beautiful data suppresses interest rate cut expectations, the U.S. dollar will show its strongest momentum in five months in 2024, and the Federal Reserve minutes show internal disagreements

The U.S. dollar rose to a two-week high on Wednesday (January 3) as investors questioned market expectations for six interest rate cuts in 2024 and was boosted by higher U.S. Treasury yields. Trying to shake off a disappointing 2023, it's showing its strongest performance in five months. Minutes of the Federal Reserve's December FOMC meeting released on Wednesday showed that Fed policymakers believed that "clear progress" was being made in lowering inflation, but "reaffirmed that the Fed will maintain a restrictive stance on interest rate policy until there are clear signs that inflation is falling sustainably." will be appropriate". "Several" policymakers noted that "circumstances may warrant keeping the Fed's (policy rate) target range at current levels for longer than expected." On the other hand, "some" (policy meeting) participants believed that an "overly restrictive" policy stance could "pose downside risks to the U.S. economy." A "minority" suggested the Fed may face trade-offs between its employment and price stability goals. At the same time, the meeting minutes showed that the Fed discussed ending quantitative tightening (QT) for the first time. "Several participants" believe that before deciding to slow down the pace of balance sheet reduction, the Fed should start discussing the technical factors that will trigger the action of "adjusting the pace of balance sheet reduction." Fed staff updated their economic forecasts at their December meeting, predicting that economic growth will be below potential for the next two years.

Nick Timiraos, the "Fed mouthpiece", wrote that the minutes of the Federal Reserve meeting showed differences among some officials within the bank: some officials believe that as the supply chain and labor market recover from disruptions related to the epidemic, the easiest part of fighting inflation has already been Finish. This requires the Fed to keep interest rates higher than necessary to suppress economic activity. Others believe that supply-side improvements are likely to continue, but core commodity prices may rebound (suggesting that further interest rate hikes may be needed). However, the U.S. economic outlook has become quite clear in recent months as inflation and wage growth have slowed. That would give the Fed more room to quickly lower interest rates if the economy weakens more than officials expect, and could still open the door for a rate cut even if the economic expansion continues to stall.

On the other hand, U.S. job vacancies and ISM manufacturing data once drove U.S. bond yields higher, but fell after the meeting minutes were released. In late trading in New York, the U.S. 10-year benchmark Treasury bond yield fell 2.64 basis points to 3.9031%. It hit a daily high of 4.0083% after the PO of U.S. job vacancies and the ISM manufacturing index. It then fluctuated downwards and fell after the PO of the Federal Reserve meeting minutes. It ended at a low of 3.8918%. The 2-year U.S. Treasury yield fell 0.41 basis points to 4.3160%. Job vacancy and other data rose to a daily high of 4.3803% after the release of the meeting minutes. They also fell to a daily low of 4.3098% after the release of the meeting minutes. The 20-year U.S. Treasury yield fell 3.35 basis points, and the 30-year U.S. Treasury yield fell 1.85 basis points. The 3-year U.S. Treasury yield fell 1.72 basis points, the 5-year U.S. Treasury yield fell 2.24 basis points, and the 7-year U.S. Treasury yield fell 2.60 basis points. The 3-month Treasury bill/10-year U.S. Treasury yield spread fell 3.829 basis points to -149.766 basis points. The 02/10-year U.S. Treasury yield spread fell 3.630 basis points to -42.104 basis points. The yield on the 10-year U.S. Treasury Inflation-Protected Securities (TIPS) fell 2.26 basis points to 1.6922%, rising to a daily high of 1.7868% after breaking away from data on job vacancies and other data.

Karl Schamotta, chief market strategist at Corpay in Toronto, said, "The market suffered a serious hangover at the beginning of the new year, U.S. Treasuries are unwinding some of the manic moves in December and the dollar is crushing its interest-rate-sensitive rivals." However, The dollar retreated some after data showed U.S. manufacturing contracted further in December, albeit at a slower pace.

The latest data from the Institute for Supply Management (ISM) shows that the manufacturing purchasing managers index (PMI) rose to 47.4 last month, after remaining unchanged at 46.7 for two consecutive months. This is the 14th consecutive month that the PMI has been below 50, indicating that manufacturing is contracting. This is the longest period between August 2000 and January 2002.

Meanwhile, U.S. job openings fell for the third consecutive month in November. The U.S. Department of Labor said in its monthly Job Openings and Labor Turnover Survey (JOLTS) report on Wednesday that job openings fell by 62,000 to 8.79 million at the end of November.

Falling inflation and a dovish tilt at the Federal Reserve's December policy meeting fueled expectations of a U.S. interest rate cut in 2024, weakening the dollar and fueling gains in U.S. Treasuries and stocks in November and December. Last week, the U.S. dollar index (102.4537, -0.0154, -0.02%) hit a five-month low of 100.61.

The minutes of the Federal Reserve meeting showed that Fed officials agreed that the interest rate hike cycle may be over and did not discuss when to start cutting interest rates. On Wednesday, U.S. stocks opened lower and closed lower, with the three major indexes collectively closing lower. The Nasdaq fell 1.18%, the S&P 500 fell 0.8%, and the Dow fell 0.76%. Most large technology stocks fell, with Tesla falling by about 4%, Nvidia, Intel, and Amazon falling by more than 1%, Apple, Microsoft, and Meta falling slightly; Google and Netflix rising slightly.

“The contradictions driving this rally are also emerging,” said Corpay’s Schamotta. “With consensus on at least six rate cuts against a still-strong economic backdrop, it’s increasingly difficult to see a broadly bearish dollar trade materialize this year. "

Analysts said the deterioration in risk sentiment was partly due to concerns about escalating geopolitical tensions after Hamas deputy leader Saleh al-Arouri was killed in a drone strike in the Lebanese capital Beirut on Tuesday. Lebanese and Palestinian security services blamed his death on Israel, which the latter neither confirmed nor denied.

The U.S. dollar index is one of the few Wall Street benchmarks that has performed better. Analysts said the dollar's strong start to the new year could be a sign that investors are more cautious about interest rates and the health of the global economy ahead of key data this week. Susannah Streeter at Hargreaves Lansdown said: "Caution has returned as investors have begun to reassess their views on the outlook for interest rates and how strong the economy will be in the coming months."

Although Chairman Jerome Powell said last month that the central bank had stopped tightening, there is not much consensus on when to start cutting interest rates. Friday's jobs report will help policymakers assess how their actions to curb inflation are affecting the labor market.

The U.S. dollar index closed at 102.46 on Wednesday, an increase of about 0.23%, and hit an intraday high of 102.73, a new high since December 14.