A Look at the Day Ahead in U.S. and Global Markets
By Mike Dolan
For all the extreme bullishness about 2025, Wall Street is 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 since 1978, yet the index remains under 4% from record highs set earlier this month.
Although the broader S&P 500 is closer to its latest peaks, that strength is concentrated in a handful of megacaps. The equal-weighted S&P 500 is down over 4% from its record on December 2, and the small-cap Russell 2000 has declined 5.5% from late November highs.
As Treasury yields sharply increased over the past fortnight, even while recent U.S. industrial production and retail sales excluding autos missed forecasts, the year-end outlook feels more anxious than the optimistic forecasts suggest.
Stock futures were slightly up ahead of Wednesday's opening, yet the VIX volatility gauge has crept above 15 this week for the first time in a month, with ten-year Treasury yields remaining above 4.4%.
The Fed is expected to announce another quarter-point rate cut to a new range of 4.25-4.5% later on Wednesday. Still, its guidance on next year's policy and individual policymakers' projections will be crucial to market reactions.
Currently, the Fed's forecasts suggest a 100 basis point decline in rates to 3.4% by late 2025. However, market expectations for the end of next year are as high as 3.90%.
How much the Fed updates this view will be a critical takeaway from today's decision, focusing on the committee's long-term neutral rate expectations. Officials are anticipated to raise the long-term policy rate view above 3% for the first time in eight years, indicating a tighter stance on what constitutes a neutral rate.
With such a "hawkish cut" expected and Treasury yields up, the dollar remained firm on Wednesday.
Other major central bank meetings this week are also anticipated to lean hawkish. In the UK, rising inflation for November and strong wage growth solidified expectations that the Bank of England would maintain steady rates on Thursday.
However, the pound slipped as UK government bonds were affected, leading to wider gilt spreads over Germany. UK stocks showed some firmness as well on Wednesday.
In Japan, the yen hovered just under 154 against the dollar, with the Bank of Japan expected to maintain policy rates but signal impending hikes.
Although the Nikkei fell, there was news of potential mergers, as Honda and Nissan are in talks to deepen ties, signaling transformations within Japan's automotive industry.
A merged Honda and Nissan would create a $54 billion enterprise with an annual output of 7.4 million vehicles, making it the world’s third-largest auto group by sales after Toyota and Volkswagen.
Chinese and Hong Kong stocks rebounded as sentiment improved due to reports of a planned record budget deficit for 2025 and ongoing GDP growth targets in China.
In Brazil, the currency and bond market are under strain due to government fiscal plans and rising interest rates. Despite interventions, the Brazilian real reached record lows as the central bank reaffirmed its tough monetary stance against inflation.
In Europe, banking developments surfaced as UniCredit announced plans to increase its stake in Commerzbank to 28%, applying for ECB approval to go up to 29.9%.
Key Developments for U.S. Markets Later Today:
- US November housing starts and permits, Q3 current account
- Federal Reserve's FOMC policy decision and statement, quarterly projections, and press conference with Fed Chair Jerome Powell
- U.S. corporate earnings reports: Micron Technology, Lennar, General Mills
Editing by Andrew Cawthorne
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