Market Turmoil: A New Phase of Caution
The Federal Reserve’s recent “hawkish cut” has sent shockwaves through global markets, with investors now bracing for 4% policy rates to become the new floor for at least the next year. The Fed’s decision has removed monetary easing as a tailwind for the stock market, causing the dollar to surge to its highest level in over two years and putting pressure on emerging, developed, and crypto currencies alike.
Fed’s Hawkish Stance
The Fed’s policymakers have lifted their median inflation forecast for next year by 0.3 percentage points to 2.5%, while only slightly increasing their GDP growth forecast to 2.1%. Moreover, they have raised their policy rate forecasts for the next two years by half a point to 3.9% and 3.4%, respectively. The long-term neutral rate has also been nudged up to 3% for the first time since 2018. According to Chair Jerome Powell, “It’s a new phase and we’re going to be cautious about further cuts.”
Market Reaction
The market has taken the Fed’s cue, with futures now pricing in the next quarter-point reduction for June at the earliest. The 10-year and 30-year Treasury yields have skyrocketed to 4.5% and 4.7%, respectively, their highest levels since May. The 2-10 year yield curve has steepened to its highest in three months, adding to the market’s angst. Debt ceiling worries have also resurfaced, with President-elect Donald Trump disrupting bipartisan efforts to avert a government shutdown.
Stock Market Woes
The historically expensive stock market has seen momentum slowing, and investors are increasingly fearful of their almost-unchallenged bullishness for 2025. Some believe that most of the positive post-election fiscal and economic scenario, as well as the U.S. ‘exceptionalism’ theme, is already priced in. The benchmark S&P 500 and blue-chip Dow Jones indexes have seen their biggest one-day percentage decline since early August, while the Nasdaq has clocked its biggest drop since July. The small-cap Russell 2000 has dropped 4.4%, its biggest decline since June 2022.
Global Central Banks
The Fed is not the only central bank making headlines. Japan’s yen has skidded to its weakest since July against the dollar after the Bank of Japan kept its rates unchanged. Sterling has emerged as an exceptional gainer against both the dollar and euro, with the Bank of England expected to hold the line on its borrowing rates. Above-forecast wage and inflation data have cemented the hawkish UK picture, despite signs of an alarming manufacturing slump.
Global Market Developments
In Brazil, there are growing concerns about the fiscal and monetary mix, with the real tumbling to a fresh record low on Wednesday. Stocks and bonds have been pressured as financial markets put the Brazilian government’s spending plans and widening deficit to the test. The alarming sight of the currency falling after steep central bank interest rate rises this week and with bond yields climbing is seen by many as a red flag.
Key Developments Ahead
Several key developments are expected to provide more direction to U.S. markets later on Thursday, including the Bank of England’s policy decision and statement, Brazil’s Central Bank’s Inflation Report, and the US Q3 GDP revision. Additionally, U.S. corporate earnings from FedEx, Nike, and Conagra Brands, among others, will be closely watched.
Leave a Reply