Christmas rally? Not today. Fed’s rhetoric stay hawkish

The Fed raised the rate by 50bp to 4.25-4.50% and kept the hawkish rhetoric. After a sharp slowdown in inflation in October and November, when the numbers came out well below forecasts, many investors decided that the Fed would soften the rhetoric and would not raise the rate above 5%. However, the updated forecasts and statements have become a cold shower for optimists. The Fed says unequivocally that the current tightening is not enough, and forecasts point to moving the rate above 5% in 2023 and maintaining it at this level over the next year. At the same time, forecasts for GDP indicate a significant cooling in economic activity, but without a recession.

Economic data and forecasts from Fed: GDP (4Q vs 4Q last year): 4Q22 estimate raised from 0.2% to 0.5% yy, for 4Q23 lowered from 1.2% to 0.5% yy. Inflation (Core PCE Inflation): estimate for 2022 increased from 4.5 to 4.8%, for 2023 – from 3.1 to 3.5% Key rate: increase to 5-5.25% in 2023 and decrease to 4-4.25% in 2024.

Back to the news on rate hike, the U.S. market reacted with a decrease. The Dow Jones dropped 0.42%, to 33,966.35, the S&P 500 fell 0.61%, to 3,995.32 level, while the Nasdaq decrease at 0.76%, to 11,170.89 level.

A combination of cold and wet weather and Russian consolidation along defensive lines has slowed advances by both Russia and Ukraine on the battlefield. At the same time the conflict continues to churn through limited reserves of troops and munitions at a high pace. Russia has ruled out a “Christmas ceasefire” after nearly 10 months of war in Ukraine. Russian equity market continued to slide with Norilsk Nickel leading declines after a report that the US was moving to impose sanctions on the company’s CEO and a large shareholder, Vladimir Potanin. IMOEX lost 1.06% to 2,136 and RTSI lost 1.02% to 1,049. Shares at Norilsk Nickel fell as much as 3% after the WSJ reported late Wednesday citing unnamed US officials that Potanin faced US measures, though the company would not be included in the sanctions list. Gazprom shares slid for a 15ht day, which is the longest streak on the record. Russian rouble was mostly flat this morning after 3 days of declines. USDRUB was up 0.1% at 64.09 and EURRUB was down 0.18% at 68.14. Russian bond yields were slightly higher with a 10-year benchmark rouble bonds yields up 2.5 bps at 10.195%. Russia sold 11.6 billion rouble worth of March 2032 OFZ at an auction yesterday with a an average yield of 3.32%. In other news, Russian state-controlled Trust Bank has sold the real estate developer Inteco, which makes it a third sale of assets by the banks previously baled out by the Central Bank of Russia. This could indicate a strategy of reinjecting assets back into the economy to support post sanction recovery, some analysts suggest.

EU markets open significantly lower on Tuesday based on Fed’s rhetoric and ahead of BoE and ECB meetings later today. On this morning the DAX index in Germany traded 1.16% lower at 14,287.55 level, the FTSE 100 in the U.K. dropped 0.8% to 7,431 points, while the CAC 40 in France traded down 1.3% to 6,643.14. Bunds continue their reversal in early trading with the benchmark DE 10Y traded at 1.932 level, GMT, some 5bps up from Wednesday’s session high.

SSA opens tilted towards weakness following Tuesday’s late surge as US CPI undershot expectations reinforcing bets of a slower pace of hiking by the Fed at its FOMC late in today’s session. Bonds rallied into the close as benchmark 10Y USTs shed some 20bps with oilers rallying at least a point as Brent also recovered to close above 80. GHANA (+2.875) the clear outperformer as the country reached a staff-level agreement with the IMF for a $3 billion programme; short end was most bid.

The NTB secondary market closed on a positive note as average yields dropped by 20bps across the curve. Average yields across the short & long tiers dropped by 28bps & 34bps respectively while yields on the medium tier. There was buying interest in Sept 7, 2023 bill. In the OMO secondary market, average yields closed flat across the curve.

The FGN bonds secondary market closed on a positive note with average yields across the curve, closing lower by 38bps. Average yields on the short, medium & long ends dropped by 140bps, 22bps & 18bps respectively. The Mar 2025 bond was the best performer.