Financial markets at a crossroads: investors await cues from the US Federal Reserve
MSCI's global stock index fell on Friday, while bond yields rose. Investors held their breath ahead of next week's Federal Reserve meeting, where key signals on the future trajectory of interest rates are expected.
Bonds: New three-week high
The yield on the US 10-year Treasury note hit a three-week high, rising for the fifth straight session. Market participants speculate that the Fed, led by Jerome Powell, may pause further easing after an expected 25 basis point rate cut. Such a move reflects the regulator's cautious approach in the face of high inflation.
Inflation: A persistent challenge for the Fed
Despite the central bank's efforts, US inflation remains above the 2% target. The latest data released on Thursday showed higher-than-expected producer price readings for November. However, fresh data on Friday showed almost flat import prices, helped by a strong dollar. However, some categories such as food and fuel continued to show gains.
Experts weigh in
"The market is pricing in a rate cut next week, followed by a pause. This seems reasonable given the contradictions between inflation data and the labor market situation," said Matt Rowe, head of portfolio management and asset strategies at Nomura Capital Management.
Market on the brink of change
The upcoming Fed decisions promise to be a key guide for investors, determining the direction of financial markets in the coming months. The main question: will the Fed be able to find a balance between fighting inflation and maintaining economic stability?
December's decline: a done deal?
Financial markets are almost unanimous in expecting the Fed to cut its key rate at its December meeting. However, the outlook for 2025 remains subdued. According to CME Group's FedWatch tool, analysts expect the rate to be cut only twice in 2025. This has market participants wondering how the regulator intends to cope with long-term economic challenges.
Factors preventing more aggressive rate cuts
The economic situation is getting more complicated: inflation continues to demonstrate resilience, and new fiscal stimulus, regulatory easing and tariff changes are on the horizon. According to Tom Fitzpatrick, head of global market research at R.J. O'Brien, these circumstances create a strong case for a subdued approach by the Fed. "With inflation sticky, further significant rate cuts seem difficult to justify," he said.
Tech: Engine or Exception?
The chip market once again reminded us of its strength. The rally in Broadcom shares (ticker AVGO) was the highlight of the week and helped the Nasdaq to end the day with a slight gain. However, the rest of the key Wall Street indexes failed to achieve similar success. This imbalance highlights the market's dependence on individual tech giants.
What's next?
The stability of the global economy remains in question. The Fed's decisions in the coming weeks and months will determine not only the dynamics of interest rates, but also the overall direction of the markets. For investors, this is a time of increased attention and analysis: every detail, from Jerome Powell's words to inflation data, can be decisive.
Dow Jones falls, Nasdaq rises
Trading on Friday closed mixed for the key US indexes. The Dow Jones Industrial Average fell by 86.06 points (0.20%) and stopped at 43,828.06. The S&P 500 was little changed, losing only a symbolic 0.16 points, while the Nasdaq Composite added 23.88 points (0.12%) to close at 19,926.72.
For the week, the S&P 500 fell by 0.64%, while the Dow Jones lost a notable 1.82%, highlighting the pressure on traditional sectors of the economy. At the same time, the Nasdaq showed a rise of 0.34%, supported by the resilience of the technology sector.
Global indices and the European outlook
The MSCI global equity index fell by 2.27 points (0.26%) on the day to 866.14, reflecting the overall decline in market sentiment. The European STOXX 600 also ended the week on a minor note, losing 0.53%. This marked the end of a three-week rally caused by hopes for a European economic recovery. But investors are now focused on the uncertain outlook for European interest rates and fears of a possible escalation of trade tensions.
Bonds: Yields continue to rise
The US Treasury market continues to signal tension. The yield on the 10-year note rose 7.5 basis points to 4.399%, setting a new local high. The 30-year note also rose, showing a rise in yield to 4.6052%.
Short-Term Bonds React to Fed Policy
Investor appetite for short-term bonds remains high, with the yield on the 2-year note, the most sensitive to the Fed's actions, rising 5.9 basis points to 4.245%. This underscores cautious expectations for the upcoming rate decisions, which will be directly dependent on economic data.
The Big Question of the Week: What's Next?
Amid mixed signals from the markets, investors continue to seek clarity on monetary policy. Key events next week, including the Fed meeting, could provide more certainty for both stocks and bonds, setting the tone for the rest of the year.
Dollar Index: Solid Weekly Gains
The US dollar ended the week with its biggest gain in a month, helped by expectations of a more cautious rate cut by the Federal Reserve. Although the dollar index was down slightly by 0.02% on Friday, ending at 106.94, the overall trend of the week showed the dominant strength of the US currency.
Euro and Pound: Different Scenarios
The euro recovered slightly, adding 0.32% and reaching $1.0501. This rise is due to a partial recovery of losses after the European Central Bank's decision to cut rates yesterday. In contrast, the pound sterling fell by 0.4% to $1.2619. This fall was caused by an unexpected contraction in economic activity in the UK, which increased fears about the country's economic slowdown.
Yen: weak expectations for Bank of Japan rates
The dollar rose by 0.66% against the Japanese yen, reaching 153.62. Such dynamics were observed throughout the week, as traders revised their expectations about a possible rate hike by the Bank of Japan. The likelihood of monetary policy tightening in Tokyo has significantly decreased, which was reflected in the weakening of the yen.
Oil quotes on the rise
Oil prices reached a three-week high, continuing their confident upward movement. The main drivers of growth were concerns about a possible supply cut amid new sanctions against Russia and Iran, as well as hopes for increased demand due to looser monetary policy in the United States and Europe.
American WTI crude rose 1.8% ($1.27), stopping at $71.29 per barrel. Brent crude added 1.5% ($1.08), reaching $76.21 per barrel.
Gold loses its shine
Amid a stronger dollar and changes in the bond market, gold showed a significant decline. The spot price fell 1.2%, amounting to $2,649.04 per ounce. This decline was the result of the growing attractiveness of dollar assets amid global economic changes.
Markets in anticipation: what will happen next?
Foreign exchange and commodity markets ended the week under the influence of mixed factors: expectations of monetary decisions, sanctions policy and economic data from different regions. Next week, key events including the Bank of Japan meeting and new inflation data will set the tone for the future. Investors will continue to watch each signal closely to assess the outlook for the global economy.
Third cut in a row
The US Federal Reserve is set to ease monetary policy again, cutting its key rate by 25 basis points. If forecasts are confirmed, this would be the third cut in a row, indicating the regulator's desire to maintain economic stability. The move was expected after the release of the latest consumer price index data, which was in line with economists' forecasts.
Revision of expectations: Where are rates heading?
Investors are revising their expectations for the pace of future rate cuts. According to market expectations, rates could fall to 3.7% by the end of 2025. This is still significantly higher than the September forecast, when expectations were 90 basis points lower. The revision underscores the growing caution of market participants.
Powell signals: 'Economy stronger than expected'
Fed Chairman Jerome Powell has hinted that a slowdown in the pace of rate cuts is increasingly likely, noting that economic data currently looks significantly stronger than expected just a few months ago. The comment adds intrigue ahead of his speech on Wednesday, when markets are awaiting more clarity on future monetary policy.
Rare Contradictions with the Market
Analysts point out that it is extremely rare for the Fed to go against the prevailing market consensus. Strong market sentiment for rate cuts is likely to be taken into account by the regulator. However, the final action will depend on a combination of inflation data, labor market indicators and the global economic situation.
BoJ Pendulum
Expectations about the Bank of Japan's policy have been swinging in the market over the past two weeks. The regulator's indecisiveness has caused high volatility in the currency markets, tying traders into a kind of "knot". Investors are waiting for concrete signals about the bank's readiness to reconsider its ultra-soft monetary policy.
European Stock Exchanges: DAX Triumph
Against the backdrop of American volatility, the German DAX continues to show phenomenal results. Since the beginning of the year, it has grown by 22%, consistently setting new records. This success underlines investors' confidence in the recovery of Europe's largest economy and the ability of German companies to cope with the challenges of the global market.
Looking Ahead: On the Threshold of Decisions
Markets are at a crossroads: from Jerome Powell's words to the actions of the Bank of Japan and the overall economic dynamics in the world, much depends on the future decisions of central banks. The next week promises to be eventful, which could set the direction of the markets for the end of the year.
Leading Sectors: Defense, Technology and Construction
Shares in German defense, technology and construction companies have shown confident growth, compensating for the weakness of the automotive sector, which has long been the driver of the German economy. However, overall growth looks sluggish, reflecting the slowdown in the economy and political instability.
Political Change: Stepping Up to Snap Elections
A vote of no confidence in the government took place in Germany on December 16, paving the way for a possible snap election in February. These developments are increasing uncertainty for businesses and investors, adding new challenges to a country already facing slowing growth.
Corporate Germany: Beyond Borders
A Goldman Sachs study shows that only 18% of the revenues of DAX companies come from their home market in Germany. By comparison, this figure reaches 33% for mid-cap companies in the MDAX. This partly explains the MDAX's 1.1% year-on-year decline, while the DAX continues to hold on to positive momentum.
Earnings Shrinking: A Worrying Signal
The third-quarter figures show a 5.4% year-on-year decline in corporate earnings in Germany. At the same time, the European STOXX index showed earnings growth of 8.2%. This divergence highlights the challenges for German businesses in the face of weak domestic demand and international competition.
Modest Prospects
In light of the current political and economic environment, analysts suggest that German equities may begin to more closely reflect market realities, which could reduce their appeal to global investors.
Rate cuts slowing
Traders expect the Bank of England to keep its key rate at 4.75% at its meeting on Thursday. That's only 50 basis points below its 16-year peak. The market is also leaning towards the view that the regulator is unlikely to make a third rate cut before February, continuing to act with extreme caution.
Taxes and prices: pressure on the market
The Labour government's decision to raise taxes for employers in the October budget has sparked criticism from large companies, who have warned of a likely rise in prices, adding to inflation fears. Amid these tensions, sterling has reached a 2.5-year high against the euro. The key driver of the British currency's strength has been the difference in their approaches to monetary policy, with the Bank of England acting more cautiously than the European Central Bank, which has been easing its policy much faster.
Bonds signal doubts
Despite the divergence in the actions of central banks, the bond market is showing a different dynamic. The yield on two-year UK government bonds, closely linked to rate expectations, has fallen to 4.38% from more than 4.5% a month ago, indicating that investors are unsure about the sustainability of the Bank of England's current course.
Services under attack: Economy slowing
Service sectors, which have long demonstrated resilience even amid weak manufacturing activity, have begun to lose ground. This was the key takeaway from November's PMIs, which measure the overall health of the economy.
Data reveals worrying trends
In the eurozone, November's composite PMI fell to 48.3, down from 50.0 in October. A reading below 50 signals contraction in economic activity. In the UK, the overall PMI fell to 50.9, the weakest reading in a year. While the reading remains above the threshold separating growth from contraction, the trend points to worsening conditions. Even in the US, long the engine of global growth, activity in the services sector has slowed.
The future of the global economy is in doubt
December PMI data, due out next week, should shed some light on the current situation. It will become clear whether the global economy continues to slow or whether the November signals were temporary.
Key questions for investors
Amid fiscal tensions, inflation expectations and worsening data from key sectors, investors and analysts will be closely monitoring the reaction of central banks and the development of global economic dynamics.
