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 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 remains closer to its latest peaks, that strength has been largely concentrated in its handful of megacaps. The equal-weighted S&P500 is down more than 4% from its record on Dec. 2 and the small cap Russell 2000 is off 5.5% from the highs of late November.
As Treasury yields 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 were up a touch ahead of Wednesday’s bell, the VIX volatility gauge 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 it sees 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 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 slipped, however, as UK government bonds were hit and 10-year yield gilt spreads over Germany widened to the peaks of the disastrous British budget blowout in 2022. UK stocks , however, were firmer on Wednesday.
Japan’s yen 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 fell, there was a deals buzz about as Honda and Nissan 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 and Volkswagen.
China and Hong Kong stocks rebounded as investor sentiment was lifted by the 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 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 said on Wednesday it had raised its potential stake in Germany’s Commerzbank 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
