A Look at the Day Ahead in U.S. and Global Markets by Mike Dolan

Although the Federal Reserve's "hawkish cut" on Thursday was broadly expected, markets now fear that 4% policy rates will be the floor for at least the coming year, with no further easing until midyear or later.

The Fed's outlook removes monetary easing as a tailwind for the stock market for months and has caused the dollar to soar to its highest level in over two years, impacting emerging, developed, and cryptocurrency markets alike.

Fed policymakers lifted their median inflation forecast for next year by 0.3 percentage points to 2.5%, nudged GDP growth up a tenth to 2.1%, and raised their policy rate forecasts for the next two years by half a point to 3.9% and 3.4%, respectively. Furthermore, they raised the long-term neutral rate forecast to 3% for the first time since 2018.

Chair Jerome Powell stated, "It's a new phase, and we're going to be cautious about further cuts," following the widely anticipated quarter-point cut into the 4.25-4.50% range.

Markets reacted, with futures not fully pricing another quarter-point reduction until at least June, while skepticism remains about further cuts throughout the year. Treasuries were also impacted, with 10-year and 30-year yields rising to their highest since May. The 2-10 year yield curve steepened to its highest in three months.

Debt ceiling concerns returned, aggravated by President-elect Donald Trump's call for Republicans in Congress to reject a bipartisan stopgap bill, risking a government shutdown by the end of the week.

These combined events left little holiday cheer for a stock market that has already seen slowing momentum and fears investor bullishness for 2025 may be overvalued. The S&P 500 and Dow Jones indexes reported their largest one-day percentage declines since August, while the Nasdaq experienced its most significant drop since July. The Russell 2000 fell 4.4%, its biggest drop since June 2022.

Although the Dow is still up 12% for 2024, it faced its 10th consecutive session of declines, marking the longest losing streak since 1974. Adding pressure to the tech sector, Micron Technology shares fell 15% after missing quarterly revenue and profit expectations due to weak demand for consumer products.

The VIX volatility gauge rose 11.75 points to close at a four-month high of 27.62 but later settled closer to 20 as stock futures worked to recover some of the losses.

Additionally, the Fed's announcement coincided with global central banks making year-end policy decisions. Japan's yen fell against the dollar as the Bank of Japan maintained interest rates, while the Bank of England was expected to hold its borrowing rates steady and take a hawkish stance.

UK wages and inflation data cement the hawkish outlook, even amidst a manufacturing slump, causing UK government borrowing premiums over Germany to widen significantly.

In Brazil, concerns increased as the real fell sharply amid government fiscal issues and pressure on stocks and bonds.

Back in the U.S., Bitcoin briefly dipped below $100,000 but regained its status post-Fed announcement.

Key Developments for U.S. Markets:

• Bank of England policy decision and statement
• Brazil Central Bank Inflation Report
• Central Bank of Mexico Inflation Report
• U.S. Q3 GDP revision, Q3 corporate profits, weekly jobless claims
• Philadelphia Federal Reserve's December business survey
• November existing home sales
• Kansas City Fed manufacturing survey
• October TIC data on overseas Treasury holdings
• U.S. Treasury sells 5-year inflation-protected securities
• Upcoming U.S. corporate earnings: FedEx, Nike, Conagra Brands, Lamb Weston, Darden Restaurants, Accenture, Carmax, Factset, Paychex, Cintas
• European Union summit in Brussels

By Mike Dolan, [email protected]