A Look Ahead in US and Global Markets by Mike Dolan
Although the Federal Reserve’s “hawkish tapering” on Thursday was widely expected, markets now fear that 4% interest rates will be the bottom for the coming year, with no easing until mid-year or later.
The picture painted by the Fed removed monetary easing as a tailwind from the stock market for months, and the dollar hit its highest in more than two years, bowling over emerging, developed and crypto currencies.
Raising their forecast for average inflation for the coming year by 0.3 percentage points to 2.5%, but only boosting GDP growth by a tenth to 2.1%, Fed policymakers also raised their policy rate forecasts for the next two years by half a point to 3.9% and 3.4. % respectively.
And they raised the long-term horizon as well, with forecasts for the long-term neutral rate rising to 3% for the first time since 2018.
“This is a new phase and we will be cautious about further cuts,” Chairman Jerome Powell said after the Fed announced a widely expected quarter-point rate cut to a range of 4.25-4.50%.
Markets took the cue, and futures won’t now fully buy another quarter-point cut until June at the latest, and it’s doubtful there will be any more for the rest of the year.
Already strained Treasuries slipped again, with 10-year and 30-year yields hitting their highest since May at 4.5% and 4.7%, respectively :
Adding to the anxiety, debt ceiling worries crept back onto the radar.President-elect Donald Trump on Wednesday scuttled bipartisan efforts to avert a government shutdown as he pressured his fellow Republicans in Congress to reject government funding after the end of the week.
The cocktail of events left no Christmas cheer for the historically expensive stock market, which is already seeing momentum slow and investors increasingly fear an almost indisputable rise in 2025. Some are now suggesting most post-election and economic scenarios, as well The theme of “exclusivity” is already in the price.
The benchmark S&P 500 and blue-chip Dow Jones posted their biggest one-day percentage declines since early August, while the Nasdaq posted its biggest drop since July.The small-cap Russell 2000 fell 4.4%, which the biggest drop since June 2022.
While it’s still up 12% year-to-date for 2024, the Dow was down for its 10th straight session, its longest daily losing streak since 1974.
And, adding to the tech volatility, shares of Idaho-based Micron Technology fell 15% after it missed quarterly revenue and profit as weak demand for consumer products such as PCs and smartphones hit the chipmaker’s business. :
With the end of the year weakening, the VIX gauge of volatility jumped 11.75 points to close at a four-month high of 27.62, although it fell back to 20 overnight.
Stock futures are also trying to claw back some of Thursday’s losses.
But the Fed was just the lead central bank in a flurry of other year-end policy decisions around the world.
Japan’s yen slipped to its weakest level against the rising dollar since July after the Bank of Japan kept interest rates on hold and offered few clues about how soon it might raise borrowing costs.
Sterling was exceptionally strong against both the dollar and the euro, and the Bank of England was expected to keep its lending rates on hold later on Thursday and is likely to be as dovish as the Fed.
Above-forecast wages and inflation data reinforced the UK’s dovish picture this week, even amid alarming signs of a manufacturing slowdown; Premiums on Britain’s 10-year government borrowing from Germany have hit their highest level since 1990.
Elsewhere, the Norwegian central bank also kept policy rates steady, with Sweden’s Riksbank cutting as expected, but also taking a more cautious approach next year.
Concerns about the fiscal and monetary mix grew in Brazil, as the Brazilian real fell the most in two years to a new record low on Wednesday, while stocks and bonds weighed as financial markets put the Brazilian government’s spending plans and deficit expansion to the test :
The alarming sight of the currency falling after such a sharp hike in central bank interest rates this week, along with rising bond yields, is seen by many as a red flag.
Statewide, post-election winner Bitcoin briefly fell back below $100,000 as the dollar rallied after the Fed, but bounced back around Thursday.
Key developments that should provide more direction to US markets later Thursday:
* Bank of England Policy Decision and Statement. The Central Bank of Brazil published the inflation report, the Central Bank of Mexico published the inflation report
* US 3Q GDP Revision, 3Q Corporate Earnings, Weekly Jobless Claims, Philadelphia Federal Reserve December Business Survey, November Existing Home Sales, Kansas City Fed Manufacturing Survey, October TIC Data Foreign Treasuries ​on reserves
* The US Treasury sells 5-year inflation-protected securities
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