Markets edgy as Fed awaited
A look at the day ahead in U.S. and global markets from Mike Dolan
For all the extreme bullishness about 2025, Wall Street is just a bit edgy as the Federal Reserve looks set to deliver its final interest rate of 2024 and give a glimpse into next year.
Remarkably, the Dow Jones Industrial Average's .DJI 9-day losing streak is the longest negative run since 1978 - but the index is still just under 4% from record highs set earlier this month.
Even though the broader S&P500 .SPX remains closer to its latest peaks, that strength has been largely concentrated in its handful of megacaps. The equal-weighted S&P500 .EWGSPC is down more than 4% from its record on Dec. 2 and the small cap Russell 2000 .RUT is off 5.5% from the highs of late November.
As Treasury yields US10YT= have backed up sharply again over the past fortnight - even as the latest U.S. industrial production and retail sales excluding autos missed forecasts for last month - the yearend is looking more anxious than ebullient new year forecasts suggest.
Although stock futures ESc1 were up a touch ahead of Wednesday's bell, the VIX volatility gauge .VIX has moved back above 15 this week for the first time in a month. Ten-year Treasury yields remained above 4.4%.
Even though the Fed is nailed on to announce another quarter-point rate cut to a new 4.25-4.5% policy rate range later on Wednesday, its guidance on what happens next year and its updated projections from individual policymakers will carry more weight in markets.
As it stands, the Fed's most recent quarterly projections put the end 2025 rate down another 100 basis points to 3.4% - but markets don't believe that now and implied rates for the end of next year are as high as 3.90%.
How much the Fed revises up that view later on Wednesday will be the critical takeaway from today's decision, with a close eye too on where the policymaking committee sees the long-term neutral rate.
Fed officials are widely expected to lift that long-term policy rate view above 3% for the first time in eight years - effectively raising the bar on what itsees as neutral, and below which the central bank would be deliberately stimulating the economy.
With such a "hawkish cut" now expected and Treasury yields pumped up, the dollar .DXY held firm on Wednesday too.
The other big central bank meetings of the week are expected to be relatively hawkish affairs too.
Another tick higher in British inflation for November, alongside Tuesday's punchy wage growth data, cemented expectations the Bank of England will remain an outlier among major western central banks and hold its rates steady on Thursday.
Sterling GBP= slipped, however, as UK government bonds were hit and 10-year yield gilt spreads over Germany DE10GB10=RR widened to the peaks of the disastrous British budget blowout in 2022. UK stocks .FTSE, .FTMC , however, were firmer on Wednesday.
Japan's yen JPY= hovered just under 154 per dollar with the Bank of Japan expected to hold the line in its policy rates on Thursday but signal further hikes are due early next year.
Even though the Nikkei .N225 fell, there was a deals buzz about as Honda 7267.T and Nissan 7201.T were reported to be in talks to deepen ties, including a possible merger - another sign of how Japan's once unbeatable auto industry is being reshaped by challenges from Tesla and Chinese rivals.
A combined Honda and Nissan would create a $54 billion company with annual output of 7.4 million vehicles, making it the world's third-largest auto group by vehicle sales after Toyota 7203.T and Volkswagen VOWG_p.DE.
China and Hong Kong stocks .CSI300, .HSI rebounded as investor sentiment was lifted bythe previous day's Reuters report on the government planning a record budget deficit for 2025 and retaining its 5% GDP growth target. And Beijing today made fresh calls on state-owned companies to boost market value.
Elsewhere, the record low Brazilian real BRL= and ailing bond market there were under mounting pressure over the government's fiscal plans and the central bank's offsetting steep interest rate rises.
Brazil's central bank reaffirmed its tough monetary policy stance on Tuesday, with policymakers highlighting unanimous concern over higher inflation expectations and a weakening currency, which continued to fall despite fresh interventions.
The bank last week doubled the pace of monetary tightening, raising the benchmark interest rate by 100 basis points to 12.25%, and signaled matching increases at its next two meetings.
But despite the bank's tough stance and a series of currency interventions after its policy decision, Brazil's risk premium has continued to rise, pushing the real to record lows and driving interest rate futures higher.
Brazil's Treasury projected on Monday that gross debt in Latin America's largest economy will only begin to decline in 2028, following an increase of 10 percentage points during President Luiz Inacio Lula da Silva's current term.
In Europe, banking news grabbed the eye.
Italian bank UniCredit CRDI.MI said on Wednesday it had raised its potential stake in Germany's Commerzbank CBKG.DE to 28% by signing new derivative contracts and has applied to the European Central Bank to be allowed to get to 29.9% of its German rival.
Key developments that should provide more direction to U.S. markets later on Wednesday:
* US November housing starts and permits, Q3 current account
* Federal Reserve's Federal Open Market Committee policy decision and statement, policymakers quarterly projections, press conference from Fed Chair Jerome Powell
* U.S. corporate earnings: Micron Technology, Lennar, General Mills
Fed projections and plots https://tmsnrt.rs/41FhCHT
Fed continues to trim bond holdings amid rate cut cycle https://tmsnrt.rs/48s4Pt5
US industrial production ebbs https://reut.rs/3OZYX21
Commerzbank shares surge https://reut.rs/4iEo6wR
UK inflation continues to rise https://reut.rs/4gFPRDc
By Mike Dolan,
mike.dolan@thomsonreuters.com; Editing by Andrew Cawthorne
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
