This Treasury dealer just slashed its Fed terminal rate forecast on the eve of the FOMC decision

It felt like it would be off to the races on Tuesday after the weaker-than-expected consumer price data, though it didn’t quite end up that way. While futures on the Dow Jones Industrial Average rose as much as 1019 points in the immediate aftermath of the CPI data, the blue chip index
DJIA,
+0.30%
ended higher by just 96 points.

Economists at Nomura, however, looked at the November CPI data showing a deceleration to a 7.1% year-over-year rate, and slashed their terminal Fed view by 75 basis points, down to a range of 4.75% to 5%. That means, another 50 basis points increase later Wednesday at 2 p.m., and then quarter-point hikes in February and in March.

That new forecast is hardly revolutionary, as the chart illustrates, but it does show that the outer limits of what the Fed might do next year have changed. Citi and TD now hold the top Fed terminal rate view on Wall Street, at a range between 5.25% and 5.5%. Most are lumped somewhere between 4.75% and 5.25%.

Given the CPI data, Nomura economists led by Rob Dent say it’s now likely that monthly core PCE inflation will decelerate below 0.3% for three consecutive months. “Part of the earlier-than-expected slowdown likely reflects economic weakness, nascent labor market cracks and larger price declines for consumer goods prices, including used vehicles, new vehicles and recreation goods,” they say.

What do they expect Chair Jerome Powell to say at 2:30 p.m.? “Chair Powell may continue to leave the Fed’s options open for a 25bp or 50bp hike in February, but he may indicate more strongly another downshift at that meeting. Finally, we see some risk the FOMC will include more concrete language on inflation progress in the post-meeting statement, lending further support to the expected downshift at the December meeting,” say the Nomura economists.

The Nomura team still expect the U.S. economy to contract next year, but now just by 0.5% rather than by 0.8%. And they now expect growth in 2024, admittedly by the smallest possible amount, 0.1%.

Besides the interest-rate decision and Powell commentary, keep an eye on the dot plot, also due to be released at 2 p.m. Strategists at TD expect the 2023 median dot to move to 4.875% from 4.625%.

The market

U.S. stock futures
ES00,
-0.01%
 
NQ00,
-0.01%,
and most asset classes for that matter, were steady ahead of the Fed decision. The yield on the 2-year Treasury
TMUBMUSD02Y,
4.201%
was 4.20%.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Traders will be turning their eyes on Washington, D.C., and not just for the Fed decision.

Negotiators say they’ve reached the framework for a fiscal 2023 government funding package, that they will vote on next week.

The Securities and Exchange Commission at 11 a.m. is set to unveil its proposals for changing how the market is structured, that could threaten the role of market makers including Citadel Securities and Virtu Financial
VIRT,
+1.32%.

The SEC separately sued eight individuals, accused of orchestrating a $100 million scheme to artifically inflate securities using social media and podcasts.

The Senate Banking Committee is due to hold a hearing on the FTX collapse, a day after the U.S. charged Sam Bankman-Fried and the House Financial Services Committee held a hearing.

Delta Air Lines
DAL,
-4.00%
rose after lifting its profit guidance, a day after Germany’s Lufthansa
LHA,
+0.54%
lifted its guidance.

Best of the web

Twitter has stopped paying rent and is considering not paying severance packages as Elon Musk gears up for legal battles.

Where is former Alameda Research CEO Caroline Ellison?

The story of how a Los Angeles mogul ended up bankrupt.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

Ticker

Security name

TSLA,
-4.09%
Tesla

GME,
-7.37%
GameStop

AMC,
-3.87%
AMC Entertainment

NIO,
-1.44%
Nio

AMZN,
+2.14%
Amazon.com

MULN,
+10.83%
Mullen Automotive

MRNA,
+19.63%
Moderna

BBBY,
-5.75%
Bed Bath & Beyond

NVDA,
+3.06%
Nvidia

DWAC,
-3.24%
Digital World Acquisition Co.

Random reads

Police rushed into an art gallery to help what they thought was an unconscious woman — who actually was an art installation.

Contrary to popular belief, female snakes do have sex organs. 

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