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The tone set by Federal Reserve Governor Christopher Waller has caused a shift in bond markets, indicating that there may not be a swift rate-cutting trajectory as previously expected. Waller, who played a role in the Fed’s dovish pivot with his remarks in November, now emphasizes a cautious approach to rate cuts, suggesting that the Fed should proceed methodically and carefully. This stance contrasts with the market’s anticipation of multiple rate cuts in 2024.
Waller acknowledges that recent economic data has allowed the Fed to consider rate cuts in 2024. Still, he emphasizes the need for careful calibration, given concerns about the sustainability of these trends. The market had priced in a more aggressive rate-cutting scenario, leading to an upward shift in yields across the curve.
The key takeaway from Waller’s recent comments is the emphasis on a more measured approach to rate cuts, challenging the market’s expectations of a March cut. While he believes that the policy settings are appropriately restrictive and should continue to put downward pressure on demand, he also notes that the healthy state of the economy provides flexibility. There is no urgency for immediate rate cuts.
Waller’s mention of potential revisions to the Consumer Price Index (CPI) data next month adds an element of uncertainty, and his suggestion of a terminal rate for bank reserves provides insight into the Fed’s monetary policy considerations. Overall, Waller’s remarks have contributed to a reassessment of rate-cut expectations and have prompted a notable shift in bond markets.
China question marks
China has achieved its growth goal for 2023, with a reported annual growth rate of 5.2%. This figure was pre-announced by Premier Li Qiang in Davos. However, the journey to this growth has been marked by challenges, including tepid domestic demand, producer prices in deflation, and three consecutive months of consumer price declines—the longest stretch of CPI deflation since 2009.
The lingering impact of President Xi’s property crackdown continues to affect the economy, with efforts to revive the housing market showing limited success. In 2024, the Chinese government plans to prioritize “industrial innovation” overconsumption, facing challenges from restrictions imposed by the Biden administration on China’s access to advanced technology.
Investors’ expectations for China’s economic growth have declined, as reflected in BofA’s Global Fund Manager survey, where expectations turned negative for the first time since May 2022. The People’s Bank of China (PBoC) refrained from a Medium-Term Lending Facility (MLF) cut earlier in the week, raising questions about potential steps for economic recovery.
Recent activity data for December showed mixed results, with retail sales, industrial output, fixed asset investment, and the surveyed jobless rate presenting a varied picture. The headwinds facing China’s economy in 2023 have not subsided, and the geopolitical environment may become more contentious following election results in Taiwan.
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