| Good morning. Markets sift through the Fed's latest signals, concerns over US commercial real estate mount and three of the Magnificent Seven announce earnings. Here's what's moving markets. — David Goodman Traders are still coming to terms the Federal Reserve's latest policy announcement, which saw the central bank signal a willingness to cut rates but appear to dash hopes of a move in March. Chair Jerome Powell acknowledged the dramatic inflation progress seen in recent months, but repeatedly emphasized the need to see "more" data confirming that downward trend. Officials also dropped their previous assertion that a rate hike was possible and instead adopted a more even-handed assessment of the future policy path. Click here to listen to our latest Daybreak podcast about the Fed. The S&P 500 dropped 1.6% Wednesday, the most since September, although US equity futures signaled a partial rebound today. European shares fluctuated. The market's response to the Fed has been complicated by renewed jitters over US commercial real estate. New York Community Bancorp threatened to grab the headlines away from the central bank yesterday as its decisions to slash its dividend and stockpile reserves sent its stock down a record 38% and dragged the KBW Regional Banking Index to its worst day since the collapse of Silicon Valley Bank last March. Those moves, which rippled through to global bond markets, were partly driven by worries over commercial real estate, which may grow further after a pair of banks also voiced concerns overnight. Tokyo-based Aozora Bank plunged more than 20% after warning of a loss tied to investments in US commercial property, while Germany's Deutsche Bank more than quadrupled its US real estate loss provisions to €123 million. Focus may shift to the corporate world today, as three of the Magnificent Seven group of tech stocks report earnings. Apple, Amazon and Meta are all set to announce their latest figures in what's been an an unusually tricky period for the behemoths. Google parent Alphabet slumped more than 7% yesterday, and declined Microsoft 2.7%, after investors delivered a negative response to their latest results. It was a big day for earnings in Europe too. Even after its warning on real estate, Deutsche Bank shares jump on Thursday after it announced a share buyback and a higher revenue goal as it laid out plans to cut 3,500 jobs over the coming years. Elsewhere in Europe, Shell gained after it defied a slump in oil prices to announced fourth-quarter profit that blew through estimates, Adidas slumped 7% after providing lower-than-expected profit guidance, and BNP Paribas dropped 8% after lowering targets. The big news in the economic world today will likely come from the Bank of England, which announces its latest policy decision at 7 a.m. New York time. Like at the Fed, the focus is on the timing of its first rate cut, although the BOE is currently expected to act later than its American counterpart. In the US, there's data due on initial jobless claims and manufacturing, before tomorrow's much-anticipated payrolls number. This is what's caught our eye over the past 24 hours. The FOMC decision yesterday was interesting. In fact it's hard to summarize it in one word like "hawkish" so I'm going to write a few bullet points of things that stood out to me. - First, the text of the announcement itself at 2PM did read hawkish. It made clear that the committee is not ready to declare victory just yet. It wants to see more data that confirm inflation is heading back to target before commencing a rate cut cycle. - Then when Powell started talking, his characterization of the economic data seemed hawkish. So for example, he emphasized that on a year-over-year basis, core PCE was down to 2.9%. But in theory he could have chosen to say that 6-month annualized core PCE is running below 2%. So he took the wider, more conservative lens. Same with the labor market. He mentioned that over the last year, we've seen improvement in the Labor Force Participation Rate (and he specifically mentioned prime-age LFPR). But he could have, theoretically, talked about the backsliding on this front from the last Jobs report. He also continues to emphasize job openings, relative to the pool of unemployed workers. But he could have talked about the quit rate staying at pre-Covid levels. So he chose the hawkish frame for each point. - But then in response to a question from the NYT's Jeanna Smialek he seemed to offer a more dovish spin. He said the Fed doesn't need to see improvement in the data. All the Fed needs to see is more data of the type that we've been seeing in recent months. So more, not better. Stocks rallied at that point to their highs of the day. - So at this point, it seemed like the way to frame the conversation was not hawkish, but rather conservative. It's more about caution, rather than feeling the need to apply more pressure to get inflation down. - He also said he had no desire to see a weaker labor market or slower growth. So he clearly believes in the theoretical possibility of a soft landing where we have a robust job market, and fast GDP, with inflation at target. Believing in the possibility of this combo of factors is a necessary precondition to achieving it.
- Another dovish aspect of the speech is that Powell seems to believe there's more juice yet to come, at least possibly, from supply chain healing. You don't hear people talking about supply chain healing that much these days. To the extent that that was ever a big part of the story, most people have moved on. And yet Powell thinks there's still something there. - Ok, so it seems plausible that the Fed just wants to see another CPI report, and also the next set of inflation revisions, which is something that Waller called out in a recent speech. But then seemingly out of nowhere, Powell made it clear that a March rate cut should not be seen as the base case. This was much more specific than it seemed like he was going to get earlier in the presser, and it was surprising to see such a specific claim come 30 minutes plus into the whole thing. That helped send stocks to their lowest level of the day.
- Something else interesting was that near the end, Powell was asked about how the Fed uses anecdotes and chats with the private sector to inform their thinking. And here Powell said that of late, their sense is that the economy is re-accelerating a little bit, which is different from the rash of layoff headlines that have been in the news lately. Anyway! A very interesting day. And a costly one for the consensus view that the Fed would be formally opening the door to the rate cut cycle. It's probably coming this year, but we still have to wait a little while. Follow Bloomberg's Joe Weisenthal on X @TheStalwart Like Bloomberg's Five Things? Subscribe for unlimited access to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close. | 
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