Fed Dot Plot
December 13, 2023
The updated dot plot will likely attract the most attention when the Fed releases its Summary of Economic Projections later this morning. Revisions to the SEP should include a lower core PCE forecast since the median core PCE estimate in September was 3.7% vs. its current tracking of ~3.4%. A lower core inflation forecast should compel members to reduce rate assumptions with the ’24 median dot falling to at least 4.875% from 5.125% in September. A Fed case using the ‘Taylor Rule’ could be made for a lower dot, but the Committee will likely be cautious about signaling more easing. Meanwhile, the OIS market remains priced for 100bp of cuts to a year-end rate of ~4.20%. Powell is expected to pushback on market pricing of rate cuts and note the Committee isn’t actively considering when they will ease policy.
Two-year bond yields remain the key to equity performance into Q4 earnings season, which starts in mid-January. In our opinion, current multiples will remain in place as long as 2-year yields can stay contained at levels below 4.84%. The disinflation theme is now consensus, but a break above 4.84% would challenge the prevailing theme, resulting in multiple compression and corrective price action. Aggregate management tone sounded fairly cautious during Q3 earning calls, especially in consumer-focused industries with high-frequency data recording a slowdown in consumer spending during October. The same high-frequency data shows that trend reversed in November with consumer spending as the second most important factor for outlook. November US retail sales are due tomorrow.