The financial calendar is quiet this week following the turbulence of last week and this report will focus on the decisive events that transpired last week and how it will impact the markets in 4Q2023.

There were no surprises with the Federal Reserve’s decision to leave the federal funds rate unchanged at 5.50% but the dovish tone from Fed chair Jerome Powell put wind in the sails behind risk-on investor sentiment. The risk-on sentiment was further supported by the weaker than expected US non-farm payrolls report which dropped to 150 thousand in October, down from 297 thousand in September. Any weaker than expected US economic data prints going forward will deem as evidence of the effect that the current rate hiking cycle has had on slowing down the US economy. As the evidence mounts for the results of the Fed’s current policy, the more the markets will price in the end of the interest hiking cycle and possible rate cuts over the near-term. This decision matrix will be the main driving force behind the market sentiment in the 4Q2023.

These were the key remarks from Fed chair Powell that sparked the risk-on sentiment. The FOMC removed a recession from their forecast at the latest meeting. They confirm that financial conditions have tightened significantly but the Fed is not considering rate cuts at the moment. The Fed is confident that it has achieved a sufficiently restrictive stance of policy and that we are likely to see slower growth and softening labour market conditions. The Fed confirmed that we are nearing the end of the current hiking cycle but that the lag effects are still unclear. Fed is not considering changing pace of balance sheet run-off.

Let’s dig deeper into that “balance sheet run-off.” The first chart of the week is one we haven’t posted before. It is the US Federal Reserve’s balance sheet. The Fed’s balance sheet exploded from $4 trillion dollars to the peak of just under $9 trillion following the quantitative easing experiment in 2020 following the pandemic. The Fed is unwinding its balance sheet (selling its assets, mainly US treasuries) and the current unwind has pulled the Fed’s balance sheet just under $8 trillion. Please also follow the link to the Fed’s balance sheet if you which to follow the Fed’s balance sheet trends: Federal Reserve Board – Recent balance sheet trends

US yields sank like a stone last week following the Fed pause and bonds were further bid following the treasury report which stated that the US treasury will refund using shorter duration bonds as opposed to longer 10-year and 30-year bonds. The weak US labour market results pulled yields down further as risk-on investor sentiment flooded the markets on Friday. The US 10-year yield fell by an eye watering 40 basis points from 4.90% to 4.50% last week. This was honestly the biggest weekly move I’ve seen in my short 3-years of following the financial markets. The 50-day MA level at 4.56% is a crucial level of support that needs to be broken for further bond market relief. It is however too early to confirm a turn in trend for the US 10-year yield.

The dollar was clobbered like a baby seal on Friday which pulled the DXY below the 50-day MA support level for the first time since July this year. The DXY still has room to drop lower before entering oversold territory. The key support level to watch now sits at 104.73 while the 50-day MA level at 105.67 will switch from a support to a resistance level. Chart link: 

Locally, the budget speech basically just highlighted the SA Government’s financial predicaments and that they will tax you more in order to raise funding, they however don’t know how they’ll raise tax revenue just yet. Despite the overall negative budget speech, the rand managed to ride the wave of global risk-on sentiment which allowed the rand to appreciate by a whopping 3.20%. The 200-day MA rate of 18.56 held no support for the pair and physiological rate of 18.00 now seems to be in the rand’s cross hairs. The pair is however entering oversold territory on the RSI indicator which will slow the rand’s momentum. A failed break below 18.12 will be the first sign of a loss of momentum but before then we need to see the 61.8% Fibonacci retracement rate of 18.26 lose its grip.

Additionally, the S&P500 gained roughly 5% last week following the drop in the dollar and the US yields. The 50-day MA will now serve as a key resistance rate for the index and it sits at $4,347.


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