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Nov 20, 2023

FOMC Minutes: Stock Market May Cheer as the Fed Reiterates Rate Hike End

By:Ilya Spivak

Stock markets may find welcome relief as November’s FOMC meeting minutes reiterate that the Federal Reserve is probably done raising interest rates. The U.S. dollar may fall further.

  • Minutes from November’s FOMC meeting in focus on a slow holiday week.
  • A familiar tone seems likely, signaling the rate hike cycle is probably over.
  • Stocks may rise while the U.S. dollar falls as stimulus hopes soothe traders.

Minutes from this month’s fateful meeting of the Federal Open Market Committee (FOMC)–the U.S. central bank’s policy-steering body–stand out as an inflection point in an otherwise barebones week for financial markets. The minutes may offer a cheerful send-off for U.S. markets as they shutter for the Thanksgiving holiday midweek.

Traders cheered the outcome of November’s conclave, reading officials’ messaging to mean that–with all due disclaimers–the interest rate hike cycle has probably ended. It bookended the saga that began with September’s FOMC meeting, where Fed Chair Jerome Powell and company deftly talked the markets into tightening on their behalf.

Fed communication strategy: tightening without rate hikes

Worried investors walked away from that gathering shaken by a Fed threatening to keep interest rates “higher for longer”. Its updated set of economic forecasts implied needing rates to be 50 basis points (bps) higher in 2024 than previously expected. Stocks fell and long-end bond yields rose as swelling term premium pointed to building uncertainty.

Treasury Bond Term Premium
Data Source: Bloomberg

By mid-October, Powell signaled in a speech at the Economic Club of New York that this yields surge has done enough to tighten financial conditions without further hikes. That followed a wave of dovish commentary from other central bank officials. The stage looked set for confirmation in November, and markets seem convinced that it came.

Wall Street cheered. The bellwether S&P 500 index is on pace for its best month since July 2022. The 10-year Treasury bond yield is down over 10%, amounting to the biggest downswing since March 2023, when the Silicon Valley Bank-led banking crisis gripped financial markets. The U.S. dollar is down 3.2%, the most in a year.

Now, the policy path priced into Fed Funds futures shows that the probability of further tightening in this cycle has been erased. The first 25 bps rate cut is set to appear no later than June. The likelihood of an earlier decrease in May is at a hefty 71.4%. Three 25 bps cuts are in the price by the end of 2024, with a 60% probability of a fourth one.

November FOMC minutes: whispering sweet nothings

As liquidity begins to drain ahead of U.S. market closures, a FOMC minutes document reiterating that the cost of capital has probably stopped rising may soothe investors. Would-be stressors like wars in the Middle East and Europe and corporate chaos at OpenAI, a darling of the high-flying tech sector, might seem more digestible when capital is seen getting cheaper rather than more expensive in the future.

Futures-implied FOMC Outlook vs. S&P 500
Data Source: Bloomberg

With that in mind, the FOMC minutes need to break new ground for the policy outlook. A status quo message in line with the pathway already expected by investors may see the markets breathing a welcome sigh of relief, allowing stocks to drift higher while the greenback retreats as participation levels drop.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak 

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