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Fed minutes show uncertainty over rate cuts

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By Craig Erlam  

Stock markets spent a second day in the red, continuing the softer start to the year as traders were waiting for the minutes from the December FOMC meeting that cited lower inflation risks.

Given the remarkable end to 2023, it’s not particularly surprising that we’re seeing a little profit-taking at this stage. A lot has been priced in and we’re awaiting some big figures on the US labour market later in the week.

Although market players anticipated the possibility of rate cuts ahead, the December 12 Federal Reserve meeting showed uncertainty among some officials who may not be quick to lower interest rates in 2024.

The FOMC minutes showed Fed officials voiced concerns about how long the economy could hold up under current high interest rates and at least initial discussion about when to halt the rundown of its balance sheet, according to a Reuters report.

The U.S. central bank is reportedly done raising interest rates and expected to begin reducing borrowing costs by the end of 2024.

The JOLTS data showed the trend continues to weaken in the labour market, with openings falling to 8.79 million in November. This is still well above the pre-Covid levels, reaffirming the view that despite some cracks appearing, the labour market remains very healthy.

But at least they’re heading in the right direction and consistent with the Fed achieving its objective: price stability and a soft landing.

The ISM manufacturing PMI was broadly in line with expectations, improving slightly to 47.4, while remaining well below the 50 level that separates growth from contraction. The ISM prices component is arguably more interesting, potentially pointing to further disinflationary pressures from the manufacturing sector.

Oil rallies on risk to supplies

Oil traded a few percentage points higher on Wednesday, buoyed by protests at Libya’s largest oilfield and further attacks in the Red Sea. Both could threaten output if intensified, but may not pose a substantial upside risk to prices otherwise.

Brent and WTI are trading around these low levels because the market is well supplied and cracks have appeared in the OPEC+ alliance, creating uncertainty around its output cuts.

Brent remains around 14% below its September highs and below $80.

Gold falls on dollar strength

Gold has given back some of its late December gains in the first couple of sessions of the new year, weighed down by a stronger dollar and slightly higher yields.

It could be a sign that investors view the moves late last year as a bit over the top or simply some profit-taking ahead of the FOMC minutes and Friday’s jobs report.

I don’t think traders’ views have fundamentally changed though, with 150 basis points of rate cuts from the Fed heavily priced in this year.

Bitcoin pares losses after ETF speculation

It was a volatile day for bitcoin which was trading almost 9% lower at one stage, before clawing back around half of those losses.

The decline appeared to follow a report suggesting the SEC could be poised to reject bitcoin ETF applications again, which would be another setback for the industry.

In reality, it would probably only delay approval rather than prevent it, but it would be interesting to see how cryptos would respond considering how much the ETF has fueled the rebound.

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.