Here’s a preview of what the day might hold for both the U.S. and international markets, courtesy of insights from finance expert Mike Dolan.
The Federal Reserve’s decision on Thursday, dubbed a “hawkish cut,” wasn’t entirely out of the blue for most analysts. However, it seems the markets are now bracing for interest rates to remain at 4% through at least the next year. The anticipated timeline for any easing of these rates could stretch into the middle of next year, or perhaps even later.
This shift from the Fed suggests that stock markets may not be able to rely on monetary easing as a driving force for some time. As a result, the dollar has surged to its highest point in over two years, affecting not just emerging markets but also developed economies and cryptocurrencies.
The Federal Reserve has upped its inflation forecast for next year by 0.3 percentage points to 2.5%, while the GDP growth estimate crept up slightly to 2.1%. In terms of policy rates, there’s an increase of half a point expected over the next two years, bringing them to 3.9% and 3.4% respectively.
For the long term, the Fed has also raised its neutral rate projections to 3%—the first such increase since 2018. Fed Chair Jerome Powell noted, “We’re entering a new phase and will tread cautiously regarding further cuts,” as the Fed made a quarter-point cut to adjust the rate range to 4.25-4.50%.
The markets responded to this cautious tone, with futures indicating that another rate reduction isn’t fully priced in until June at the earliest, casting doubts on any further cuts within the year. Meanwhile, U.S. Treasuries took a hit again, with yields on 10-year and 30-year notes jumping to their highest since May. Consequently, the 2-10 year yield curve now sits at its steepest in three months.
Adding to the market’s turmoil are renewed concerns about the debt ceiling. President-elect Donald Trump shook up bipartisan efforts to prevent a government shutdown by urging Congressional Republicans to reject a temporary funding bill.
The combination of these factors has sapped any holiday cheer from an already expensive stock market. With momentum slowing, there’s a growing sense of unease over investor confidence toward 2025. It’s thought that much of the anticipated positive impacts from post-election fiscal policy and the U.S.’s perceived economic “exceptionalism” are already factored into current valuations.
On the stock market front, major indices like the S&P 500 and Dow Jones experienced their largest single-day percentage drops since early August, while the Nasdaq saw its biggest fall since July. The small-cap Russell 2000 took a 4.4% hit, its sharpest decline since June 2022. Despite its 12% climb for the year, the Dow has now recorded its tenth consecutive session of losses, marking the longest streak since 1974.
Further unsettling the tech sector, Micron Technology shares plummeted 15% post-market after failing to meet quarterly revenue and profit expectations, largely due to weak consumer demand for PCs and smartphones.
As the year winds down, the VIX volatility index surged 11.75 points to close at a four-month high of 27.62, though it did ease back toward 20 overnight.
Looking globally, the Fed’s decision sits amid a series of year-end policy updates from major central banks. The Bank of Japan held its rates steady, leading to the yen weakening to its lowest point since July against the climbing dollar. Meanwhile, the British pound gained ground against both the dollar and the euro with expectations of hawkish tones from the Bank of England later that day, spurred by recent wage and inflation data.
Over in Norway, the central bank kept rates stable, while Sweden’s Riksbank made anticipated cuts but hinted at a more cautious outlook for next year. In Brazil, the financial landscape is shaky as concerns rise about fiscal and monetary policy. The Brazilian real fell dramatically, marking its biggest drop in over two years amid broader market skepticism over the government’s spending plans.
Meanwhile, back in the U.S., the post-election darling Bitcoin dipped below the $100,000 mark as the dollar strengthened post-Fed announcement, though it managed to regain that level by Thursday.
For U.S. markets on Thursday, there are key indicators to watch for further direction, including:
– The Bank of England’s policy decision and statement
– Inflation reports from the central banks of Brazil and Mexico
– U.S. Q3 GDP revision and corporate profits, alongside jobless claims data and various Federal Reserve surveys
Additionally, the U.S. Treasury will issue 5-year inflation-protected securities, while several major companies, including FedEx, Nike, and others, will report their earnings. Finally, the European Union summit in Brussels is also on the radar.
Stay tuned as these developments unfold and shape the market narrative.
