SignalPlus Macro Analysis Special Edition: FOMC Meeting

In short - "The committee believes that it is not appropriate to lower the interest rate target range until there is greater confidence that inflation can sustainably move toward 2%" and [Powell] "believes that the Fed is unlikely to start cutting rates in March."

The FOMC meeting yesterday and the market price movements can be summarized in one sentence - don't expect a rate cut in March for now. Although the Fed removed the inclination to raise rates from the official statement as expected, the market was caught off guard by this clear hawkish counter-commentary, even though the specific meaning of "greater confidence" remains unclear; in any case, this is seen as a direct denial by the Fed of the market's growing expectations for easing policies, leading OIS rates to jump 10 basis points from their lows (reversing earlier gains from the weak ADP and labor cost index), with the market's expectation of a rate cut dropping to around 30%.

At the 2:30 press conference, Powell initially tried to "balance" the hawkish statement with the following comments:

• The policy rate "has entered restrictive territory."

• "Easing policy restrictions at some point this year" is appropriate.

• FOMC members are "increasingly confident" about easing inflation, but "we want to gain greater confidence."

• "We are not looking for better data, but we hope to see better data sustained."

• Regarding inflation, Powell pointed out that "the composition of inflation data is less important than the overall inflation level," which is a response to the ongoing divergence between goods and services inflation.

However, at the end of the Q&A session, the chairman's following comments completely dashed the hopes of the doves:

• "There was no proposal for a rate cut at this meeting."

• "There is still a long way to go to achieve a soft landing."

• [Powell] "believes that the Fed is unlikely to cut rates in March."

The final comments had a devastating effect, with the 2-year Treasury yield rising about 8 basis points, and the stock market plummeting about 1.5% that day, indicating that the real 2024 has just begun.

In addition to the Fed meeting, there were other noteworthy news items. First, the highly anticipated bond issuance plan fully met market expectations, alleviating pressure on bond prices. Although the Treasury Department raised the quarterly issuance size for the third consecutive time, officials stated that this would be the last increase in 2024, and the supply size (a total of $121 billion in 3-year/10-year/30-year bonds next week) fully aligns with the pace set last November; additionally, the Treasury confirmed that it would announce the start date of a new buyback plan in the May refinancing announcement, aimed at assisting cash management and improving the liquidity of off-the-run Treasuries.

Regarding the term structure of bond issuance, the Treasury stated that it expects to maintain the current auction size of Treasury bills at least until the end of the first quarter, followed by a slight reduction in the next quarter. In any case, as the Treasury continues to sacrifice a certain degree of financing prudence to provide relief for long-term bond supply, the share of Treasury bills in the total issuance will remain above the recommended range.

In other news, ADP was weak (+107,000 vs last month's +158,000), the labor cost index (the slowest annualized growth since 2021), Chicago PMI (46 vs 47.2), and New York Community Bancorp (a regional bank in New York) announced a dividend cut due to significant loan impairments, causing its stock price to plummet by 40%.

The bank acquired part of Signature Bank last year, and due to a 48% surge in loans overdue by more than 30 days in the fourth quarter, coupled with expectations of further weakness in the commercial real estate market, it increased its loan loss reserves; this quarter, the total amount of bad debt write-offs soared to $185 million, exceeding the total impairment losses of the past 10 years, resulting in a net loss of $252 million for the bank in the fourth quarter, far below analysts' expectations of a profit of $206 million, and it announced a dividend cut of about 70% to preserve cash.

Although many credit analysts believe this is an isolated, stock-specific event, the shadow of last March lingers in many people's minds, and the upcoming exit of the BTFP program in March undoubtedly does not help alleviate concerns. The KBW Bank Index in the U.S. fell as much as 5.5% that day, ultimately closing down about 3%.

In the stock market, aside from the panic triggered by the hawkish Fed and NYCB, the earnings reports from major companies were generally disappointing. AMD (-2.6%), Samsung (-2%), Google (-7%), Microsoft (-2.5%), and Disney (-2.5%) all reported profits that fell short of current high expectations. The technology, energy, and consumer discretionary sectors led the indices lower, but there was no widespread panic, as the actual volatility of the SPX remained generally below the implied volatility of the VIX.

In the cryptocurrency space, the results of the FOMC meeting have not yet had a significant impact; however, the latest court hearing news indicates that FTX is expected to fully compensate its customers and will abandon plans to restart FTX 2.0 due to difficulties in finding buyers. Although the cryptocurrency industry has faced multiple attacks from mainstream groups, the largest bankruptcy event will now achieve equivalent compensation (based on dollars rather than tokens), which may not be so bad compared to the "worthless" recovery situations of many venture capital, private equity secondary markets, Chinese real estate bonds, and U.S. commercial real estate funds.