Wednesday's Markets Update (December 18, 2024)

19 Dec 2024 by rate3

On Wednesday, stocks plummeted after the Fed cut interest rates by 25 basis points but signaled fewer cuts than anticipated. This sparked a market sell-off, with the S&P and Nasdaq falling by approximately 3% and 4%, respectively, while the Dow dropped 1,123 points—its longest downward spiral (10 days) since 1974. A record current account deficit was reached due to the AI-driven import of semiconductors. The euro and yuan hit their yearly minimums, while the dollar rose to a 24-month high. Meanwhile, the South Korean won reached a 16-year low amid continuing political turmoil. BTC dropped below $100K, while ETH reached $3.4K following the stock market avalanche. BTC ETFs have surpassed gold ETFs.

Details

The Fed cut interest rates by 25 basis points in December 2024 to the 4.25%-4.5% range, but signaled fewer rate cuts (2 cuts, 50 points) for 2025 than previously anticipated (4 cuts, 100 points). The Fed also revised its economic projections upward (2.5% vs to 2% in 2024; 2025 (2.1% vs 2%); 2% for 2026), with higher core inflation growth (2024 (2.8% vs 2.6%), 2025 (2.5% vs 2.2%), 2026 (2.2% vs 2%)) and lower unemployment (2024 (4.2% vs 4.4%), 2025 (4.3% vs 4.4%), 4.3% for 2026) forecasts. 1Y trend: "Down" (FED)
Building permits surged 6.1% in November, reaching the highest level in nearly a year. This strong growth was driven by increases in permits for single-family homes and buildings with five or more units. 1Y trend: "Down" (Census)
Mortgage applications declined slightly to 5.4% in the week ending December 13th, following a significant surge in the previous week. While purchase applications increased, refinance applications fell due to rising interest rates. 1Y trend: "Down" (MBA)
A record-high current account deficit of $310.9B was reached in Q3 2024. This was driven by a widening goods deficit (imports of capital goods, including computer accessories, semiconductors, and electric apparatus) and an increase in secondary income deficits. 1Y trend: "Down, Increasing" (BEA)
Housing starts unexpectedly declined 1.8% in November, driven by a sharp drop in multi-family housing starts. While single-family home starts increased, overall housing construction activity weakened. 1Y trend: "Down" (Census)

Crypto

BTC ETFs have surpassed gold ETFs in total assets under management, reaching $129B. This milestone, achieved in less than a year since the launch of spot BTC ETFs, signifies a shift in institutional investor preferences towards BTC. (source)

World Markets

Eurozone inflation rose slightly to 2.2% in November. While energy price declines slowed, inflation for services and food eased. Core inflation remained steady at 2.7%. 1Y trend: "Down" (EU)
Argentina's unemployment rate fell to 6.9% in the third quarter of 2024, reaching its lowest level since Q4 2023. 1Y trend: "Down" (AR)

Currencies

The dollar surged to a 24-month high after the Fed cut interest rates by 25bps but signaled a less dovish path for 2025. The Fed's hawkish outlook, along with revised economic projections, boosted the dollar against major currencies. 1Y trend: "Up"
The South Korean won plunged to 16-year low. This was driven by a combination of factors, including the Fed's hawkish stance, the BoK's dovish outlook, and political uncertainty in South Korea. 1Y trend: "Up, Depreciating"

Comment: What's Up with the Fed?

That I am fundamentally against the existence of the Fed shall not be a secret to my readers. The Fed is a 110-year-old relic of the Marxist-Keynesian past, which was included in Stalin's and Mussolini's playbook of the 'scientific management' of all aspects of human life, first and foremost their economic and financial activities.

The real reason behind that "management" is not, of course, the desire to make people's lives better by avoiding "economic crises." In all 110+ years of the Fed's existence, they have proven to be absolutely incapable of doing so. The real reason is to gain additional and very powerful leverage to control individuals, especially those with more brains and, therefore, wealth than others.

Despite all my natural skepticism, more often than not, I can't suppress my bewilderment at how low the professional qualifications of those running this atrocious institution are and how large their preoccupation with their own bureaucratic and political egos and careers is.

That is what happened today. All fundamentals have been showing slowing production, slowing employment, and yes, even slowing consumer consumption. So, all core inflation factors were indicating that the economy is entering stagnation, especially as non-core inflation (energy and food) has started to rise since around May-June of 2024.

However, despite them saying themselves that non-core inflation is out of their reach and that the employment situation has started to look worrisome, they not only decided to cut 25 points, which was expected, instead of the urgently needed 50, but Powell also found it necessary to briskly change his outlook for future 2025 rate cuts from more-or-less dovish (4 cuts) to nearly hawkish (two cuts, maybe).

It must be absolutely obvious to anyone with expertise in economics and markets that this will lead to a swift market reaction. That is exactly what happened. Now everyone, including corporate traders, is confused as to whether the reasons for that abrupt change are more politically driven—trying to influence Trump's lower-tax-higher-tariff policies before they are actually implemented.

Indeed, if we now have a situation on our hands similar to but in reverse of that in Brazil, where Lula is fighting his central bank for his pro-spending, socialist policies, if Powell starts to fight Trump for his pro-capitalist tax-easing policies, we'll indeed have such volatility in the markets in 2025 for which any hedge manager would sell his soul.