A look at the day ahead in the US and global markets from Mike Dolan
Although the Fed’s “tight cut” on Thursday was widely expected, markets now fear 4% interest rates will be the floor for at least next year – and no further easing until mid-year or later.
The picture painted by the Fed has been removing monetary easing as a tailwind for the stock market for months and has seen the dollar rise to its highest levels in more than two years – outperforming emerging, developed and crypto currencies alike.
Fed policymakers raised their average inflation forecast for next year by 0.3 percentage point to 2.5%, but pushed up GDP growth only by a tenth to 2.1%, and also raised their forecast for interest rates for the next two years by half a point to 3.9%. 4%. % respectively.
They also raised the longer-term horizon, with the long-term neutral rate forecast rising to 3% for the first time since 2018.
“It is a new phase and we will be cautious about further cuts,” Fed Chairman Jerome Powell said after the Fed announced the widely expected quarter-point cut to the 4.25-4.50% range.
Markets took the signal and futures are now not fully pricing in another quarter-point cut until June at the earliest – and I doubt there will be more over the rest of the year.
Already soured Treasuries were hit hard again, with 10-year and 30-year bond yields jumping 4.5% and 4.7%, respectively, to their highest levels since May. The 2-10 year yield curve steepened to its highest level in three months.
Adding to the concerns, debt ceiling concerns have resurfaced on the radar. President-elect Donald Trump on Wednesday disrupted bipartisan efforts to avoid a government shutdown as he pressured Republicans in Congress to reject a stopgap bill to keep the government funded beyond the weekend.
The combination of events has left no Christmas cheer for a historically expensive stock market that has already seen momentum slow and is increasingly fearful of investors’ almost unchallengeable upside for 2025. Some are now pointing to a mostly positive post-election financial and economic scenario as well as a theme of “exception “The American is already in the price.
The S&P 500 index and the Dow Jones index of major stocks saw their largest single-day percentage declines since early August, and the Nasdaq index recorded its largest decline since July. The small-cap Russell 2000 fell 4.4%, its biggest decline since June 2022.
Although still up 12% for 2024 so far, the Dow Jones suffered declines for the 10th straight session — its longest streak of daily losses since 1974.
Adding to the volatility in the technology sector, shares of Idaho-based Micron Technology fell 15% after the bell after missing quarterly revenue and profit estimates as weak demand for consumer products such as personal computers and smartphones hurt the chipmaker’s business.
Casting a pall over the end of the year, the VIX volatility gauge jumped 11.75 points to close at a four-month high of 27.62 — though it eased back near 20 overnight.
Stock futures are also trying to recoup some of Thursday’s losses.
But the Fed was just the lead central bank in a series of other year-end policy decisions around the world.
The Japanese yen slid to its weakest levels since July against the dollar after the Bank of Japan kept interest rates unchanged and gave little indication of how quickly it would be able to raise borrowing costs.
The pound made exceptional gains against both the dollar and the euro, as the Bank of England is expected to hold interest rates on its borrowing later Thursday and is likely to tighten monetary policy like the Federal Reserve.
Better-than-expected wages and inflation data this week reinforced the UK’s hawkish picture even amid signs of worrying manufacturing decline – with Britain’s 10-year government borrowing premiums on Germany rising to their widest range since 1990.
Elsewhere, Norway’s hawkish central bank kept interest rates steady. The Riksbank cut interest rates as expected, but also guided a more cautious approach next year.
In Brazil, there was growing concern about the fiscal and monetary mix there as the Brazilian real fell the most in more than two years to a new record low on Wednesday and stocks and bonds came under pressure as financial markets took stock of the Brazilian government’s spending plans and the deficit widened. For testing.
The worrying sight of the currency falling after a sharp rise in central bank interest rates this week and with bond yields rising is seen by many as a red flag.
Back in the US, post-election winner Bitcoin briefly fell below $100,000 as the dollar rose after the Fed – but regained the full figure on Thursday.
Key developments that should provide further guidance to US markets later on Thursday:
* Bank of England decision and policy statement. The Brazilian Central Bank releases its inflation report, and the Mexican Central Bank releases its inflation report
* Review of Q3 US GDP, Q3 corporate earnings, weekly unemployment claims, December Philadelphia Fed business survey, November existing home sales, Kansas City Fed manufacturing survey, and TIC data For October on external treasury holdings
*The US Treasury sells 5-year inflation-protected securities
* US corporate profits: FedEx, Nike, Conagra Brands, Lamb Weston, Darden Restaurants, Accenture, Carmax, Factset, Paychex, Cintas
* European Union summit in Brussels
(Written by Mike Dolan, mike.dolan@thomsonreuters.com)