Weekly Market Insights: Federal Reserve's Hawkish Tilt, Crypto Breakouts, and Global Economic Highlights
HIGHLIGHTS
Market Overview: A choppy week driven by a hawkish Federal Reserve (Fed), tariff threats, increasing yields, and concerns about a potential US government shutdown. The Volatility Index (VIX) surged approximately 85%.
Federal Reserve: The Fed cut rates by 0.25% to 4.25% - 4.5% but revised its 2025 rate cut projections from three to two. Officials indicated it may take longer for inflation to reach the 2% target.
Japan: The Bank of Japan (BoJ) held rates steady as expected but issued dovish remarks. The BoJ Governor expressed concerns about upcoming wage and economic data. No consensus on a January hike.
TikTok: The US Supreme Court will hold an expedited hearing next month on a potential TikTok ban unless it is sold by its Chinese parent company. Social media stocks rallied following the original ruling.
Data as of market close, 12/20/2024.
VIEW FROM THE STREET
Equity:
Standard Chartered: Recommends buying the dip in US equities after this week’s selloff. Accelerating earnings growth is expected to drive equities higher.
Goldman Sachs: Prefers equal-weighted sectors over the equal-weighted S&P 500 for the next six months, emphasizing health care, utilities, real estate, software services, and materials.
Fixed Income:
Morgan Stanley: Fixed income returns are aligned with coupon yields due to rate volatility and tight spreads. Junk bonds, especially CCC-grade, are up over 16% in 2024.
J.P. Morgan: Bond volatility persists amid inflation and tariff uncertainties, constraining fixed-income returns.
Economy:
UBS: The Fed’s cautious approach suggests two 25bps cuts in 2024, in June and September.
Morgan Stanley: Small businesses show renewed confidence, as reflected in November’s National Federation of Independent Business survey.
FEDERAL RESERVE DECEMBER MEETING: KEY TAKEAWAYS
The Fed’s updated dot plot surprised markets, indicating just two rate cuts in 2025, down from four in September’s projections. This aligns with market pricing, which anticipates just one cut in 2025 per the CME FedWatch tool.
Chair Powell emphasized strong US economic fundamentals and expressed optimism about growth and the labor market.
Updated Projections:
#1. GDP growth: 2.1% for 2025 (vs. 2.0% in September).
#2. Unemployment rate: 4.3% for 2025 (vs. 4.4% in September).
Inflation Outlook: Core PCE inflation is expected to hit the 2% target by 2027. Tariff policy uncertainties could impact inflation in the interim.
Our Take: The Fed’s cautious stance reflects ongoing inflation and tariff uncertainties, but the trajectory for rates remains downward. This should support consumption, borrowing costs, and market sentiment.
CRYPTOCURRENCY MARKETS
Bitcoin (BTC):
Reached an all-time high of $106,533, fueled by Microstrategy’s inclusion in the Nasdaq 100, opening doors to passive capital inflows.
Weekly inflows: Bitcoin spot ETFs recorded $2.17 billion, while Ethereum spot ETFs saw $855 million.
Ethereum (ETH):
Struggling to break Bitcoin dominance, with ETHBTC hovering around 0.04.
Key levels: $2,800 / $3,000 / $3,500 / $4,100.
Altcoins: Investors show interest in XRP, CRV, NEAR, and others.
Derivatives Market: Bitcoin basis rates are strong at 20.68%, with Ethereum at 18.06%. Wholesale investors are capitalizing on these opportunities through delta-neutral strategies.
WEEKLY TECHNICALS & MACRO OUTLOOK
Gold: Holding trendline support.
DXY: Near a multi-year breakout, influenced by rate cut velocity.
AUD/USD: Trading at historic lows (~0.635), driven by the RBA’s steady policy.
Key Data Next Week:
#1. Chinese activity data (Mon).
#2. FOMC policy decision (Wed).
#3. Japanese CPI (Thu).
#4. US Core PCE Price Index (Fri).
MARKET SENTIMENT
Despite recent volatility, fundamentals remain intact. The US economy is resilient, supported by strong GDP growth (Q3: 3.1%, Q4 forecast: 3.2%). Market pullbacks are seen as opportunities for long-term investors to diversify and rebalance.
CONCLUSION
While uncertainty looms over inflation and tariffs, the Fed’s gradual approach and the robust US economy provide a stable backdrop for investors. Leveraging market dips and maintaining quality investments will be key strategies moving forward.