Ladies and gentlemen, the Federal officially pivoted on their monetary policy the previous week. Although the Fed left the federal funds rate unchanged at 5.50%, the FOMC’s dovish statement and the Fed’s latest Dot plot suggest that the Fed will cut rates three times in 2024 with the median assessment pointing to rates falling to 4.625%. Additionally, median projections for inflation ticked down in 2024 and 2025, while unemployment forecasts are little changed, indicating Fed officials’ growing confidence they can cool price gains without big job losses.
The Fed pivot lit up risk-on investor sentiment like the drunk uncle that brought fireworks to the family Christmas party. We will be jumping straight into the charts this week to show you the magnitude of the moves in the market following the Fed’s statement.
First up is the US 10-year bond yield. Bonds and stocks rallied on the news that the current hike interest rate environment will soon be irradiated by rate cuts. US 10-year yields fell by a whopping 20 basis points from 4.20% to just under 4.00% on Wednesday and the yields sunk further below the 200-day MA as the week progressed. If yields remain below the 61.8% Fibonacci retracement level of 3.93% a drop back into the blue support range and the 2023 low of 3.26% looks like the next move given the current investor sentiment.
Similarly, the dollar fell through the floor on Wednesday which saw the greenback depreciate by roughly 0.85% in the single session. The 200-day MA support has broken, and the next critical level is the 61.8% Fibonacci retracement rate of 102.58. A break below this level could see the DXY fall towards the 2023 low of 99.61 given the current risk-on investor sentiment.
The next chart just plots the US 10-year yield and the DXY on the same plane to highlight their positive correlation. When markets are risk-off, the DXY and US 10-year yield start to rise. However when markets are risk-on, like we have seen since October 2023 when the FOMC stated that “tighter financial conditions likely to weigh on economic activity”, the DXY and the US 10-year bond yields fall. DXY is in green, yields in blue.
The Santa rally was kept alive and well as stock indices rallied at an eye watering pace. Investors bought risk assets like their lives depended on it which sent the Dow Jones to a fresh all-time high while the S&P 500 and the Nasdaq gained roughly 1.40% and 1.10%, respectively on Wednesday. Again please pay attention to the correlation between bond, currency and equities. The S&P 500 bottomed out at $4,110 in October 2023 (the same month that the DXY and US 10-year yields topped out) and has gained almost 15% since then. Currently, the S&P 500 is just 2.35% off its all-time high.
Let us shift to the local side of things. There was a host of local data released last week but the headline was the latest CPI print for November which climbed 5.5% year-on-year, down from 5.9% in October. In addition, mining and manufacturing production for October climbed 3.9% and 2.1% respectively.
The local data however was overshadowed by the news from the Fed. As we have mentioned the rand is a risk asset thus the rand managed to catch the risk-on wave which allowed the rand to pull the USDZAR pair below the 200-day MA support rate of 18.65. The failed break above the black 61.8% Fibonacci retracement rate of 19.04 is rand positive and the break below the 200-day MA is an early signal for a move lower towards the blue 61.8% retracement level at 17.93.
