A look at the day ahead in US and global markets from Mike Dolan
Although the Federal Reserve’s “hawkish tapering” was widely expected on Thursday, markets now fear a policy rate floor of at least 4% for the coming year – and no further easing until mid-year or later. will be
The picture painted by the Fed has seen the dollar rocket to its highest level in more than two years — on par with emerging, developed and crypto currencies — as tailwinds from the stock market for months. bowling
Fed policymakers raised their policy rate forecasts for the next two years by half a point, lifting their median inflation forecast for next year by 0.3 percentage points to 2.5%, but projecting GDP growth by only a tenth to 2.1%. 3.9% and 3.4%. % respectively.
And they also raised the long-term horizon, with estimates for the long-term neutral rate up to 3% for the first time since 2018.
“This is a new phase and we’re going to be cautious about further cuts,” Chair Jerome Powell said after the Fed announced a widely expected quarter-point cut to the 4.25-4.50% range.
Markets took the hint and futures don’t fully price another quarter-point cut until June — and doubt there will be more for the rest of the year.
Already stretched Treasuries suffered again, with 10-year and 30-year yields hitting 4.5% and 4.7%, respectively, the highest levels since May. The 2-10 year yield curve has reached its highest level in three months.
Adding to the furore, debt ceiling concerns are back on the radar. President-elect Donald Trump on Wednesday undermined bipartisan efforts to avert a government shutdown as he pressed his fellow Republicans in Congress to reject a stopgap bill to keep funding the government through the end of the week.
The cocktail of events left no Christmas cheer for a historically expensive stock market that already appears to be slowing and investors fear an almost-unprecedented bullishness for 2025. Some now suggest a mostly positive post-election fiscal and economic outlook. The US ‘exceptionalism’ theme is already priced in.
The benchmark S&P500 and the blue-chip Dow Jones index saw their biggest one-day percentage declines since early August and the Nasdaq posted its biggest drop since July. The small-cap Russell 2000 fell 4.4%, the biggest decline since June 2022.
Although it’s still up 12% for 2024, the Dow suffered its 10th straight session of decline — the longest streak of daily losses since 1974.
And adding to the turmoil in tech, shares in Idaho-based Micron Technology missed quarterly revenue and profit estimates after falling 15% as weak demand for consumer products such as personal computers and smartphones hit the chipmaker’s business. .
Casting a pall at 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 rebounded to near 20 overnight.
Stock futures are also trying to recoup some losses on Thursday.
But the Fed was the central bank’s only headline in a stream of other year-end policy decisions around the world.
Japan’s yen fell to its weakest since July after the Bank of Japan left its rates unchanged, giving some clues about how quickly it could raise borrowing costs.
Sterling was an uncharacteristic gainer against both the dollar and the euro, with the Bank of England expected to hold the line on its lending rates later on Thursday and the Fed potentially dovish.
Above-forecast wages and inflation data cemented the UK’s bleak picture this week even amid signs of a worrying manufacturing slowdown – with 10-year UK government borrowing at a premium over Germany, the widest since the 1990s. with the
Elsewhere, the Norwegian central bank also kept policy rates steady. Sweden’s Riksbank cut as expected, but also guided for a more cautious approach next year.
In Brazil, there were growing concerns about the fiscal and monetary mix as Brazil’s real fell to a fresh record low on Wednesday by the most in two years and pressured stocks and bonds as financial markets weighed on the Brazilian government. spending plans and increased the deficit. to test.
The alarming sight of the currency falling this week as the central bank raises interest rates sharply and bond yields rise is seen by many as a red flag.
Back stateside, post-election winner bitcoin was briefly knocked below $100,000 as the dollar rebounded after the Fed – but regained the round figure on Thursday.
Key developments that should give US markets more direction later Thursday:
* Bank of England policy decisions and statements; Brazil Central Bank released inflation report, Central Bank of Mexico released inflation report
* US Q3 GDP revisions, Q3 corporate profits, weekly jobless claims, Philadelphia Federal Reserve’s December business survey, November current home sales, Kansas City Fed manufacturing survey, October TIC data on foreign Treasury holdings
* The US Treasury sells 5-year inflation-protected securities
