Mike Dolan's look at the day ahead in US and global markets
Although the Federal Reserve's “hawkish cut” is widely expected on Thursday, markets now fear that 4% policy rates will be the floor for at least the coming year – and no further easing until mid-year or later.
The picture painted by the Fed removes monetary easing as a tailwind from the stock market for months and has seen the dollar rocket to its highest in more than two years – bowling over currencies that come to the fore, advanced currencies and crypto currencies.
Raising their median inflation forecast for next year by 0.3 percentage points to 2.5% but only pushing GDP growth up 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 also raised the longer-term horizon, with projections for the long-term neutral rate rising to 3% for the first time since 2018.
“It's a new era and we're going to be cautious about further cuts,” Chairman Jerome Powell said after the Fed announced the widely expected quarter-point cut to a range of 4.25-4.50%.
Markets took the cue and futures are now not fully pricing in another quarter-point drop until June at the earliest – and doubt there will be more over the rest of the year.
Treasuries, which had already worsened, were smashed again, with 10-year and 30-year yields vaulting 4.5% and 4.7% respectively to hit their highest since May. The 2-10 year yield curve rose to its highest in three months.
Compounding the angst, debt worries came back onto the radar. President-elect Donald Trump on Wednesday disrupted bipartisan efforts to avoid a government shutdown as he pressed his Republicans in Congress to reject a stopgap bill to keep the government funded past the end of the week.
The cocktail of events left no Christmas cheer for a historically expensive stock market that has already seen momentum slow and is increasingly fearful of investors' almost unchallenged enthusiasm for 2025. Some are now suggesting most the positive fiscal and economic scenario after the election as well as the theme of US 'exceptionalism' is already in the price.
The benchmark S&P500 and the top Dow Jones indexes saw their biggest one-day percentage declines since early August and the Nasdaq clocked its biggest fall since July. The small-cap Russell 2000 fell 4.4%, its biggest fall since June 2022.
Although still up 12% for 2024 to date, the Dow suffered its 10th straight session of declines – the longest streak of daily losses since 1974.
And adding to the wobble in technology, shares in Idaho-based Micron Technology plunged 15% after the bell after it missed quarterly revenue and profit estimates as weak demand for consumer products such as PCs and smartphones hit the chipmaker's business.
Throwing a damper on the annuity, the VIX volatility gauge jumped 11.75 points to close at a four-month high of 27.62 – although it eased back closer 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.
The Japanese yen slipped to its weakest since July against the pounding dollar after the Bank of Japan kept rates unchanged and offered few clues about how soon it might push up borrowing costs.
Sterling was a huge gainer against the dollar and euro, with the Bank of England expected to hold the line on lending rates later on Thursday and is likely to steer just as hawkish as r Fed.
This week's forecast wages and inflation data confirmed the UK's hawkish picture even amid signs of an alarming manufacturing slump – with UK 10-year government borrowing premiums over Germany ballooning to their widest since 1990.
Elsewhere, the hawkish Norwegian central bank held policy rates steady. Sweden's Riksbanks cut as expected, but also guided for a more cautious approach next year.
In Brazil, there was growing concern about the fiscal and monetary mix there as the Brazilian real fell the most in over two years to a new record low on Wednesday and stocks and bonds were under pressure as financial markets gave the Brazilian government spending plans and lack of expansion. to the test.
The alarming sight of the currency falling after such a steep central bank interest rate rise this week and with bond yields climbing is seen by many as a red flag.
Back stateside, post-election winner Bitcoin was briefly knocked back below $100,000 as the dollar rebounded from a feed – but regained the round figure on Thursday.
Key developments that should give US markets more direction later Thursday:
* Bank of England policy decision and statement; Brazil's Central Bank releases Inflation Report, Mexico's Central Bank releases inflation report
* US Q3 GDP review, Q3 corporate profits, weekly jobless claims, Philadelphia Federal Reserve December business survey, November existing home sales, Kansas City Fed manufacturing survey, October TIC data on foreign Treasury holdings
* The US Treasury sells 5-year inflation-protected securities
