A look at the day ahead in U.S. and global markets from Mike Dolan
With Federal Reserve policy likely paused until midyear and megacaps throwing up a mixed bag of results so far, stock markets stayed calm overnight as attention switches to European interest rates and a fourth-quarter U.S. GDP healthcheck.
Quarterly results from Microsoft and Meta after the bell on Wednesday drew different reactions, with the artificial intelligence theme more broadly thrown into the flux this week by China’s DeepSeek revelation.
With the heavy AI spend of both firms in question due to the arrival of the cheaper Chinese model, but defended by their respective bosses overnight, Microsoft shares shed 4% out of hours while Meta jumped 4%. Traders fretted about the former’s cloud business outlook but took Meta’s beat at face value.
Auto giant Tesla jumped 4%, meantime, as plans for cheaper models this year appeared to offset an earnings miss. Apple and Intel top another heavy earnings diary on Thursday.
The upshot before Thursday’s open is that index futures are up to half a percent higher, brushing aside Wednesday’s expected Fed decision to keep rates on hold while it assesses the impact of new government policies in Washington.
Chair Jerome Powell said the Fed was in no “hurry” to change a “well-positioned” stance even as President Donald Trump lambasted the central bank for doing a “terrible” job on inflation while claiming it spent too much time on diversity and climate.
Fed futures were broadly unchanged – pricing in another cut by midyear, only a 20% chance of an earlier move in March and two cuts overall for 2025.
But Treasury yields have ebbed since the decision, in part due to signs of a weakening of the economy late last year and also as interest rates tumbled elsewhere around the world.
The Bank of Canada cut its policy rates by another quarter point on Wednesday, citing in part the threat of Trump tariffs to the economy, and the European Central Bank is widely expected to lop another 25 basis points off its key rate on Thursday.
TRADE DEFICIT
But as traders awaited the release of U.S. fourth-quarter gross domestic product readouts later on Thursday too, Wednesday’s news of a sharp widening of the international trade deficit reset some calculations about just how brisk growth is coming into this year.
The U.S. goods trade deficit vaulted to a record high in December, prompting the Atlanta Fed’s closely-watched “GDPNow” model to recalibrate to a 2.3% rate from a prior estimate of 3.2%.
Forecasts for GDP growth prior to the trade release had centred on a 2.6% annualized rate for the last quarter – down from a 3.1% pace in the July-September period.
Although still expanding well above the 1.8% rate that Fed policymakers view as the sustainable non-inflationary pace of growth, the economy is expected to have clocked a 2.8% advance for the full year – just off the 2.9% recorded for 2023.
Ten-year Treasury yields fell back close to the year’s lows around 4.5% ahead of the report, helped by a slide in U.S. crude oil prices to their lowest since Jan. 2 – with the year-on-year fall in crude as much as 7% for the first time in a month.
The dollar index was steady, with the euro dipping slightly ahead of the expected ECB rate cut.
In contrast to the still-upbeat U.S. growth rates, disappointing German and French GDP numbers for Q4 have given the ECB every reason to keep easing policy.
The German economy contracted more than expected in the final quarter of last year as Europe’s biggest economy struggles with trade worries and uncertainties ahead of a federal election next month. GDP fell by 0.2% in the fourth quarter compared with the previous three-month period, and France unexpectedly contracted too – amid political and budgetary impasses there.
Italy also stalled, leaving Spain as the only country among the euro zone’s big four with a positive growth rate in Q4.
A sliver of optimism cut across the reports from a pickup in euro zone economic sentiment in January and, encouraged in part by ECB easing, euro zone stocks climbed another 0.5% on Thursday.
That was despite some earnings-day hits to some big European companies. Deutsche Bank fell 6% after Germany’s largest lender posted a bigger-than-expected drop in fourth-quarter and 2024 full-year profits. STMicroelectronics, one of Europe’s largest chipmakers, fell 8% to a near five year low after a poor forecast for the first quarter.
With trade anxieties high on the list of concerns, the chance of a first sweep of Trump tariffs as soon as next week still looms large – even though officials appeared to hold out the chance of a deal and indicating reviews through April 1.
Trump’s commerce secretary nominee Howard Lutnick said that Canada and Mexico can avoid Trump’s threatened 25% U.S. import tariffs if they swiftly act to stop allowing fentanyl and illegal immigrants into the United States.
“And as far as I know, they are acting swiftly, and if they execute it, there will be no tariff,” he said.
Key developments that should provide more direction to U.S. markets later on Thursday:
* European Central Bank policy decision, with press conference from ECB President Christine Lagarde
* US Q4 GDP estimate, weekly jobless claims, December pending home sales
