A look at the December Fed Minutes
and asset allocations for the first quarter + bank earnings coming up!
The December FOMC meeting minutes were released yesterday, January 04 at 2pm ET. The markets didn’t receive it well initially but decided to fight the Fed and end higher. Despite the discussion around the Fed’s minutes being hawkish, the market did its thing.
If you look at our coverage of the actually FOMC Press Conference on December 14, there wasn’t any much new that we discovered in the minutes that the Fed Chair didn’t say that day. As reminder this is from the article I’d written after the FOMC meeting:
For 2023, they expect:
Lower GDP at 0.5% now vs. 1.2% previously
Unemployment at 4.6% vs. 4.4% previously
PCE Inflation to come down to 2.1% by 2024
No rate cuts for 2023
No change to the 2% inflation target
The key messages were the same… there’s no rate cut forthcoming in 2023 and there’s still some ways to go in terms of inflation. But, what they did emphasize is that they wanted to make it very clear that lowering the rate hike to 50bps instead of 75bps doesn’t mean that there’s any change in their resolve. ⬇
No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023… A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path. Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.
One year ago, in January 2022, the Fed Minutes sparked a sell-off. This year it hardly moved the market despite the distinctly hawkish message.
We spent the whole of last year with a large faction of the market disbelieving the Fed’s resolve in hiking rates and in fact, anticipating a rate cut or a pivot. But, the Fed has been firm in the actions and their message. We shouldn’t fight the Fed.
What do we anticipate for the market this year after these meeting minutes? Well, it shouldn’t be much different. Financial conditions have weakened considerably since last year and this will transfer to economic conditions. This is what we can tell at least until mid-Year.
I would look at asset allocation by Quarter, and the by Month without going too far into the future as the landscape keeps changing.
Read on below for further analysis on what I’m looking at in terms of asset allocations for Q1 and the Financial Sector before earnings season ⬇