A FED meeting for the history books?
(US National Debt, Bond Holdings, Stop Wall Street Landlord Act)
A few days late, I would like to comment briefly on last week's FOMC meeting on Wednesday. First of all, it should be said that this meeting could go down in the history books. Jerome Powell did not even try to dampen the market's dovish expectations. On the contrary, he clearly left the hawkish path ("higher for longer") and gave the market what it wanted to hear. This was more or less announced in the run-up to the meeting by Treasury Secretary Yellen, who held out the prospect of reaching the 2% inflation target by the end of 2024 in several statements:
and already one day earlier:
The motivation for Ms. Yellen's intervention should be clear. US debt is rising at an insane rate and up to 30% will have to be refinanced next year. At the current yield level of Treasuries (1y: 5.026%, 2y: 4.423%, 5y: 3.896%, 10y: 3.905%, 20y: 4.189%, 30y: 4.010%), this will be a very expensive proposition after years of rock-bottom interest rates.
The problem with Yellen's “fairy tale“, however, is that inflation has not gone away. The latest figures for November were released on December 12. Core inflation (ex food & energy) is still at 4% and, given the current yields on the bond market, there is nothing to suggest that this level will fall any time soon. And despite the apparent persistence of inflation and a forecast of 3.8% economic growth for 2024, Powell was dovish last Wednesday?
In this respect, the last FOMC meeting must clearly be seen as the start of a rescue mission. The obvious attempt to lower the yield level is not only intended to put the high level of US debt on a financially viable footing. In my opinion, it is also about rescuing many banks that can actually be described as bankrupt due to the negative Mark to Market of their bond books. It was not without reason that bank shares made considerable gains in the run-up to and after the meeting. Here the example of Goldman Sachs:
I would also like to briefly mention the Stop Wall Street Landlords Act. Without speculating further, it is at least not entirely far-fetched to think that Powell has also done institutional investors in the US housing market a favor. Due to the high monthly burden on US households seeking financing, the real estate market has come to a virtual standstill. A price correction, which would have been the economically logical step with high mortgage interest rates and high house prices, could of course be avoided with a rapid fall in key interest rates. The older generation and institutional investors are happy, the younger generation bears the burden. Either as tenants or as buyers.
Finally, a few words about the dollar. The Fed meeting has put pressure on the dollar and this is generally in line with our frequently expressed medium-term forecast that the dollar will continue to correct downwards. I had based this on the fact that the sharp rise in US debt would no longer be flanked by sufficiently high interest rates for investors. The FED press conference reinforced rather than invalidated this argument. But right now, of course, it is important to pay particular attention to the upcoming inflation data. While upward surprises could help the dollar again in the short term, they are also a huge problem for the dollar in view of the high debt burden.
With regard to the last real trading week, I no longer have any particular opinion on the dollar's performance in the final days of the year. The correction from 107.35 (high of 03oct23) to 101.77 (low of 14dec23) could have been the end of the recent downtrend for now. The Dollar Index (=DXY) is currently trading in the middle of the 100.80/104.40 range. The trend of this trading week will probably continue until the end of the year. I am flat here.
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Sebbo