December 19th Financial News

West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $69.50 on Thursday. The WTI price posts modest gains as US crude inventories fell and the US Federal Reserve (Fed) lowered its key interest rate by a quarter percentage point on Wednesday.

However, the signal that the US central bank would slow the pace of reductions might cap the upside for the black gold. The Fed made its third consecutive cut of 2024, reducing the federal funds rate by 25 basis points (bps) at its December meeting on Wednesday.

The US central bank signalled it would slow the pace of the easing cycle as sticky inflation and US President-elect Donald Trump's proposed policies could prove inflationary. The Fed officials indicated that it probably would only lower twice more in 2025. This, in turn, lifts the Greenback and exerts some selling pressure on the USD-denominated commodity price as it makes oil more expensive in other countries, which can reduce demand.

Additionally, the concerns about the weakness in consumer spending in China, the world's largest oil importer, could weigh on the WTI price. “Bearish momentum spawned by the China data destroyed any hopes speculators had of breaking out of the two-month range to the upside,” noted Robert Yawger, director of the energy futures division at Mizuho Securities USA. 

A decline in US crude inventories last week might provide some support to the WTI. The Energy Information Administration (EIA) weekly report showed crude oil stockpiles in the United States for the week ending December 13 declined by 934,000 barrels, compared to a fall of 1.7 million barrels in the previous week. The market consensus estimated that stocks would decrease by 1.425 million barrels. 

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

Source: FXSTREET

The Federal Reserve Open Market Committee (FOMC) cut the federal funds rate to the 4.25% to 4.50% range and announced it would continue its balance sheet runoff.

The Fed maintained its language on growth and inflation, stating “economic activity has continued to expand at a solid pace”, that the “labor market conditions have generally eased” and that “inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”

On the future path of policy, the statement added more specificity that it is considering “the extent and timing” of additional adjustments to the target range. Seemingly setting up the possibility of a pause in interest rate cuts.

The Fed’s Summary of Economic Projections was updated from September:

The median projection for real GDP growth was upgraded to 2.5% in 2024, 2.1% in 2025, 2.0% in 2026, 1.9% in 2027, and 1.8% over the long run (from 2.0%, 2.0%, 2.0%, 2.0% and 1.8%).

The median unemployment rate forecast was upgraded slightly to 4.2% in 2024, 4.3% in 2025, 4.3% in 2026, 4.3% in 2027, and 4.2% over the long run (from 4.4%, 4.4%, 4.3%, 4.2%, and 4.1%).

On inflation, the median estimate for core PCE was raised to 2.8% in 2024, 2.5% in 2025, and 2.2% in 2026, and 2.0% in 2027 (from 2.6%, 2.2%, 2.0%, and 2.0%).

The median projection for cuts to the fed funds rate was reduced by 50 basis points over 2025 and 2026. This raised the level of the fed funds rate to 3.9% in 2025, 3.4% in 2026, 3.1% in 2027, and the long-run neutral rate was assumed to be 3.0% (from 3.4%, 2.9%, 2.9% and 2.9%).

President of the Cleveland Fed, Beth Hammack, voted against today’s decision, having preferred for the Fed to have paused at this meeting.

Key Implications

After confirming that the Fed followed through on its 25 bp cut, everyone immediately moved to see how the central bank’s view on future rate cuts shifted. No surprise, the Fed expects to be more cautious in 2025 than it forecast prior to the election of President Trump. It has removed 50 bps in cuts, while it has marked up its outlook for inflation. We’d also note that more members are aligned to the median view of 50 basis points in cuts than were aligned on 100 bps in September.

Market pricing agrees with the Fed’s more cautious approach, with an increasing likelihood that the Fed will have to pause rate cuts in January. While we don’t think investors should rule out a January cut completely, with the Fed’s preferred inflation rate stuck at 2.8% year-on-year, and expectations that President Trump will follow through on his inflationary political strategy, it makes sense that the Fed will be much more cautious come the New Year.

US Stocks Smashed After Hawkish Fed Cut – Nasdaq Down 3.5%

Greenback Surges Higher After Hawkish Fed

More Central Banks in Focus Today

Summary

As widely expected, the FOMC cut the target range for the federal funds rate by 25 bps at today’s meeting. However, one Committee member, who preferred to keep rates on hold, dissented.

The median dot for 2025 in the so-called “dot plot” was raised by 50 bps. In September, the median FOMC member looked for 100 bps of policy easing next year. The median forecast today looks for only 50 bps of rate cuts next year.

The wide dispersion in the dot plot for next year may reflect some uncertainty regarding the policy agenda that the incoming administration may pursue. Notably, the range of core PCE inflation forecasts for 2025 widened considerably.

Fed Cuts Rates but Forward Guidance Is Hawkish

As widely expected by market participants, the Federal Open Market Committee (FOMC) reduced its target range for the federal funds rate by 25 bps at its policy meeting today (Figure 1). The FOMC has now cut its target range by 100 bps from its peak of 5.25%-5.50% through moves of 50 bps in September, 25 bps in November and 25 bps today. Although the Committee eased policy today, we would characterize the decision as a “hawkish” rate cut.

For starters, Beth Hammack, the president of the Federal Reserve Bank of Cleveland, dissented today, voting to keep rates on hold instead. In that regard, Chair Powell noted in his post-meeting press conference that today was a “closer call” to cut rates by 25 bps than it was in November. Secondly, the Committee made a notable change to its post-meeting statement. The statement that was released following the last FOMC meeting on November 7 contained the following clause: “In considering additional adjustments to the target range for the federal funds rate…” This clause implied that the FOMC thought last month that it would continue to ease policy in coming months. That clause was changed to the following in today’s statement: “In considering the extent and timing (emphasis ours) of additional adjustments to the target range for the federal funds rate…” This rewording of the clause implies to us that the FOMC may now pause in the next meeting or two to ascertain how much additional policy easing may be appropriate.

The FOMC also released its quarterly Summary of Economic Projections (SEP) today. As we projected in our recent Flashlight report, the median forecast for real GDP growth in 2025 was revised a touch higher, the unemployment rate forecast for the end of next year edged down from 4.4% in the September SEP to 4.3% in today’s projections, while the core PCE inflation rate for 2025 was pushed up from 2.2% to 2.5%. Accordingly, the median dot in the so-called “dot plot” rose by 50 bps for 2025 (Figure 2). In September, the median FOMC member thought that a target range for the federal funds rate of 3.25%-3.50% would be appropriate at the end of 2025. The median FOMC member today now thinks that a range of 3.75%-4.00% will be appropriate. In other words, the median member now thinks that only 50 bps of additional easing next year will be warranted if conditions evolve as expected.

That said, the dots for next year are widely dispersed. The most dovish Committee member thinks that 125 bps of additional easing would be appropriate next year, while the most hawkish member sees no additional rate cuts from today’s level. This dispersion may reflect uncertainty surrounding the policy agenda that the incoming Trump administration may pursue in 2025. Notably, the range of forecasts among FOMC members for core PCE inflation, which the Fed believes is the best measure of the underlying rate of consumer price inflation, widened meaningfully for next year between September and December. The range for 2025 core PCE inflation in the September projection was 2.1% to 2.5%. The range in today’s SEP widened to 2.1% to 3.2%. Some FOMC members may be assuming that tariff hikes, should they go into effect, will raise inflation next year. (See the report we wrote in July for further discussion of the macroeconomic effects of tariffs.)

In sum, today’s FOMC meeting leads us to believe that, barring some dramatic unexpected development, the Committee likely will keep rates on hold at its next meeting on January 29. However, we believe the FOMC will continue to ease policy next year, albeit at a slower pace than over the past few months. Chair Powell seemed to support this expectation when he noted in his presser that the stance of monetary policy is “significantly closer to neutral” than it was previously, but that policy is “still meaningfully restrictive.”

Wall Street closed sharply lower on Wednesday, with the Dow falling over 1,100 points after the U.S. Federal Reserve delivered a rate cut as expected but signaled it will ease the pace of further cuts in the coming year.

For the Dow it was its tenth consecutive daily loss, marking its longest losing streak since 1974 and its biggest daily percentage decline since early August. The Nasdaq and S&P 500 also logged their largest one-day drops in months.

Benchmark Treasury yields moved higher on the news, and the dollar gained.

"Let's not forget, you tend to get knee-jerk reactions on Fed Day and then cooler heads prevail the next day," said Ryan Detrick, chief market strategist at Carson Group in Omaha. "The reality is still we have a strong economy and a Fed that is by no means looking to hike any time soon. There are still cuts, likely coming just a little later in 2025."

As expected, the Federal Open Market Committee (FOMC) cut the Fed funds target rate by 25 basis points at the conclusion of its final policy meeting of 2024.

But the central bank also reduced the number of projected rate cuts in the coming year. The policymakers now expect two interest rate cuts by the end of 2025, down from four in September, and set up the likelihood of a pause in January.

"The Fed didn't throw any curveballs, right? They cut as expected, and they're using language hinting at fewer cuts next year and into 2026," Detrick added. "The market was holding out hope that maybe there'd be a little more dovishness to the statement, but that wasn't the case."

In his subsequent press conference, Fed Chair Jerome Powell offered assurances that the economy is strong, inflation has come closer to the 2 percent goal, and monetary policy is well-positioned to deal with risks.

The Dow Jones Industrial Average fell 1,123.03 points, or 2.58 percent, to 42,326.87, the S&P 500 fell 178.57 points, or 2.95 percent, to 5,872.03 and the Nasdaq Composite fell 716.37 points, or 3.56 percent, to 19,392.69.

Earlier, European shares closed modestly higher, buoyed by technology stocks and French automaker Renault, but gains were held in check ahead of the Fed's rate decision.

MSCI's gauge of stocks across the globe fell 8.93 points, or 1.03 percent, to 855.09.

The STOXX 600 index rose 0.15 percent, while Europe's broad FTSEurofirst 300 index rose 2.56 points, or 0.13 percent.

Emerging market stocks fell 0.39 points, or 0.04 percent, to 1,092.81. MSCI's broadest index of Asia-Pacific shares outside Japan closed lower by 0.05 percent, to 579.42, while Japan's Nikkei fell 282.97 points, or 0.72 percent, to 39,081.71.

Yields for 10-year U.S. Treasuries gained after the Fed flagged the slower pace of easing.

The yield on benchmark U.S. 10-year notes rose 11.3 basis points to 4.498 percent, from 4.385 percent late on Tuesday.

The 30-year bond yield rose 7.3 basis points to 4.6525 percent from 4.579 percent late on Tuesday.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 10.5 basis points to 4.346 percent, from 4.241 percent late on Tuesday.

The dollar extended its gains against a basket of world currencies as investors digested the Fed's revised outlook.

The dollar index rose 1.09 percent to 108.09, with the euro down 1.13 percent at $1.037.

Against the Japanese yen, the dollar strengthened 0.76 percent to 154.63.

Bitcoin accelerated its losses after Powell said the Fed has no desire to hold the cryptocurrency amid debate over whether the incoming Trump administration might build a bitcoin reserve.

Bitcoin fell 5.17 percent to $100,916.00. Ethereum declined 6.14 percent to $3,692.50.

Oil prices settled higher in the wake of the Fed's decision.

U.S. crude rose 0.71 percent to settle at $70.58 per barrel, while Brent settled at $73.39 per barrel, up 0.27 percenton the day.

Gold fell in opposition to the greenback. Spot gold fell 1.94 percent to $2,594.24 an ounce. U.S. gold futures fell 2.05 percent to $2,590.20 an ounce. (Reuters)

Source: Koreatimes