Investors lock gaze on Fed minutes

The US dollar began the year on a strong footing on Tuesday, accelerating its advance through the day and even recording gains of more than 1% against some currencies.

With no clear event or catalyst to fuel the greenback, the advance may have been the result of traders considering the retreat during the end of 2023 as overdone, and/or reevaluating their Fed rate cut bets. Indeed, alongside the US dollar, Treasury yields also rose, with the 10-year benchmark rate briefly returning above 4% yesterday for the first time since December 14. The total number of basis points worth of rate reductions expected by the market for the whole year was slightly lowered to 150 from 155, while the probability of a March quarter-point cut now rests at around 85% compared to 95% early on Tuesday.

Will the Fed minutes shake the market’s implied rate path?
Today, dollar traders are likely to lock their gaze on the minutes of the December FOMC gathering for more clues regarding the Committee’s future course of action. Back then, policymakers revised down their dot plot to suggest that interest rates will end 2024 at 4.6%, 50bps lower than September’s 5.1%. On top of that, at the press conference, Fed Chair Powell sounded more dovish than expected, saying that rate increases are not the base case anymore and that the question now is “when will it become appropriate to begin dialing back?”

With that in mind, investors may dig into the minutes to see if they can get any clues regarding the timing of a potential first reduction. But even if they don’t find anything relating to the timing, should rate cuts prove to be a main topic in officials’ discussions, traders may be tempted to start selling the dollar again as they ramp up their cut bets.

That said, their view could be affected ahead of the minutes as the ISM manufacturing PMI for December and the JOLTS job openings for November are scheduled to be released. The former is expected to have risen to 47.1 from 46.7, with an improvement being corroborated by a small rise in the preliminary S&P Global manufacturing PMI. Job openings are also expected to have increased, perhaps adding a glimpse of hope that Friday’s NFP data for December may also come somewhat brighter than expected. Such numbers may allow some more dollar buying heading into the minutes.

Nasdaq slides more than 1% on tech tumble
On Wall Street, the Dow Jones Industrial Average managed to record fractional gains on the first trading day of the year, but both the S&P 500 and the Nasdaq slid, with the latter losing 1.63% as tech stocks suffered.

The weak start follows a year where all three indices locked double digit gains due to artificial intelligence euphoria, slowing inflation and aggressive rate-cut expectations. However, with the rally appearing overstretched, some investors and managers may have decided to lock some profits or hedge their positions ahead of this week’s risk events. Although multiples have been long suggesting stretched valuations, participants may have accelerated their stock buying in December due to their calculations suggesting that the expensive prices are fairly reflecting present values of future growth opportunities, thereby triggering a FOMO (fear of missing out) response.

This week, equity traders may also turn their attention to data and events regarding Fed policy as anything corroborating or adding to the market’s narrative of aggressive reductions this year could result in elevated present values for high-growth firms that are usually valued by discounting expected free cash flows for the quarters and years ahead.

Oil slips as risk aversion overshadows Red Sea tensions
In the energy sphere, oil prices reversed their early gains and closed Tuesday in the red. Perhaps the crisis in the Red Sea was overshadowed by the broader risk-averse environment.

Moving forward, even if the tensions in the Middle East ratchet up, any related advances are likely to stay limited and short-lived due to record crude production in the US and subdued global demand. What’s more, with the scale of the cuts that the OPEC+ group has announced, it may be difficult for the group to cut more this year, which means limited ability for the alliance to provide a helping hand to prices.