Futures Rebound After Powell’s Hawkish Pivot Plunge

US futures staged a partial recovery on Thursday after the worst Fed day rout since the 2013 Taper Tantrum, suggesting the selloff after the Federal Reserve’s hawkish pivot was overdone, even as stock indexes  in Europe and Asia retreated as equity markets caught up with post-Fed moves in the US. As of 8:00am, S&P futures advanced 0.5% following the US benchmark’s biggest lost for a scheduled Fed decision day since 2001. Nasdaq 100 contracts rose 0.4% even as chip leader Micron crashed 13% on disappointing guidance. 10Y yields rose again, hitting 4.53%, the highest level since May and nearly 100bps higher than the 2024 lows reached in September. The dollar retreated after soaring on Monday even as the yen cratered after the Bank of Japan left rates unchanged, disappointing a lot of generally clueless strategists who were expecting a hike. Oil and bitcoin also rebounded after sliding on Wednesday. Key events today include the latest GDP revision, initial and continuing claims, existing home sales as well as the October TIC flows data.

In premarket trading, Micron Technology tumbles 13% after its revenue forecast missed projections, hurt by sluggish demand for smartphones and personal computers. Baidu dropped 2% after Reuters reports that Apple is in talks with Tencent and Bytedance to integrate their AI models into iPhones sold in China. Here are some other notable premarket movers:

• IonQ (IONQ) rises 5% as DA Davidson initiates with a buy recommendation, saying the stock “is positioning itself as the leader in quantum computing.”
• Lamb Weston (LW) slides 20% after the French-fry supplier cut its sales and adjusted earnings per share guidance for the full year.
• Lennar Corp. (LEN) drops 10% after the homebuilder forecast new orders for the first quarter that missed the average analyst estimate.
• Sangamo Therapeutics (SGMO) rises 8% after the biotech reached a license agreement with Astellas, under which Sangamo will receive a $20 million upfront license fee.
• Vertex Pharmaceuticals (VRTX) falls 12% after the the company’s nonaddictive drug helped patients with lower back pain in a mid-stage trial, but performed similar to a placebo, causing shares to decline.
• Worthington Steel (WS) declines 5% after posting fiscal 2Q revenue that dropped 9% from the year-ago quarter, hurt by lower volumes and selling prices.

The Fed scaled back the number of 2025 cuts it sees from four to two as Powell said future easing would require fresh progress on inflation. The reaction interrupted this year’s stellar rally in US stocks, with S&P 500 still on course to notch more than 20% of gains due to optimism about artificial intelligence and the outlook for the economy under a Donald Trump administration. While the severity of Wednesday’ reaction showed that equity markets were less prepared for the Fed’s announcement, the shift implied that profits could be stronger than anticipated in the near term, said Florian Ielpo, head of macro research at Lombard Odier Investment Managers.

“What we have seen is a little cold water poured on what is otherwise a decent economy,” John Bilton, JPMorgan Asset Management’s head of global multi-asset strategy, told Bloomberg TV. “I am constructive about next year. If I’m a bull, I have got to love a healthy pullback.” Money markets are now pricing in fewer than two quarter-point reductions for the entirety of 2025, even less than what was implied in the Fed’s so-called dot plot on Wednesday. In the SOFR options market one large block trade placed Wednesday afternoon bet on the start of another hiking cycle next year.

Elsewhere in central banks, the Norges Bank stood pat while the Riksbank cut their policy rate by 25 bps, both as expected. The Norwegian krone and Swedish krona both held higher on the day. The pound dropped after the Bank of England’s dovish hold.

In Europe, the Stoxx 600 dropped 1.2% after the surprisingly hawkish Fed messaging sparked the biggest rout in US stocks since early August. Semiconductor stocks fall after Micron Technology posted disappointing revenue forecast. Here are some of the biggest movers on Thursday:

• SoftwareOne shares rise as much as 13%, while Crayon drops 8.1% after the Swiss firm offers to buy the Norwegian IT services firm for a total of 144 kroner/share.
• Pharming shares gain as much as 11%, the top performer in the Euronext Amsterdam AEX Health Care Index, after RBC analysts boosted their price target on the Dutch biopharma company to a Street high.
• UK Water providers are among best performers in Europe on Thursday as industry regulator Ofwat announces details of a hike to bills. It’s a “major clearing event,” according to Barclays. Severn Trent is up as much as 2.1%, Pennon Group +3.5%.
• Saipem shares gained, reversing earlier losses, as a consortium including the Italian construction and drilling services co. won an offshore contract in Nigeria, which Mediobanca expects will push year-to-date book-to-bill ratio to highest in a decade.
• European semiconductor stocks slide in early Thursday trading, hit by a weak revenue outlook by memory chipmaker Micron and a Federal Reserve that signaled less urgency to lower rates further. ASML -3.7%, Infineon -3.8%, STMicro -4.7%.
• Roche shares drop as much as 2.2% after a mid-stage study of the pharmaceutical company’s prasinezumab missed its primary endpoint.
• Zurich Insurance Group falls as much as 2.3% after UBS cuts its recommendation to sell, saying the valuation leaves “limited margin for maneuver.” Munich Re is cut to neutral from buy and falls as much as 1.4%.
• Netcompany slumps as much as 11% after Carnegie downgrades its rating on the Danish IT company to hold from buy.
• Tessenderlo falls as much as 8% to its lowest intraday value in ten years, after the firm cut its adjusted Ebitda outlook for the full year, according to a statement. KBC says the valuation is still attractive due to the company’s sizable free cash flow.

Asian stocks recorded their biggest decline in over two month after the Federal Reserve dialed back expectations for rate cuts next year. The MSCI Asia Pacific Index fell as much as 1.7%, with TSMC, Samsung and Commonwealth Bank of Australia the biggest contributors to the decline. Benchmarks of South Korea and Australia were among the worst performers in the region. Indian stocks also dropped. China erased earlier declines amid expectations the government will maintain a loose policy in 2025.

“Investors need to be pretty agile, bob-and-weave as we always say,” Thomas Taw, head of APAC investment strategy at Blackrock, said in a Bloomberg TV interview. Interest rates are likely going to be higher for longer and the rest of market will take a little time to digest that, Taw said.

In FX, the Bloomberg Dollar Spot Index fell 0.1% after soaring on Wednesday; the yen tumbled 1.4% – just as we told our premium subscribers – after comments by BOJ Governor Kazuo Ueda cast doubt on whether the bank could hike interest rates in January, or even beyond that, instead signaling that more information is needed on wages and the policies of Donald Trump before making a decision. USD/JPY has topped 157, a level where the BOJ will have to start jawboning verbal intervention only this time nobody will believe it. In China, authorities ramped up support for the currency via its daily reference rate after the Fed’s caution over future rate cuts sent the offshore yuan to a fresh one-year low.

In rates, treasuries are mixed with the curve steeper as long-end yields rise an additional 3.5bp while front-end of the curve rallies as traders continue to digest Wednesday’s market reaction to the Fed policy announcement and revised dot-plot forecasts. The yield curve steepened further with 10-year borrowing costs rising another 1 bp to 4.52% while two-year yields pull back. Into the steepening move the 2s10s spread tops at the widest level since Sept. 26. Treasury 2-year yields richer by around 3bp on the day while 30-year yields rise around 3.5bp, steepening 2s10s and 5s30s spreads by 5.5bp and 4bp on the day; US 10-year yields trade around 4.535%, just off session highs and at cheapest levels since May. Gilts outperform Treasuries slightly after UK bonds rallied in the aftermath of Bank of England voted 6-3 to keep rates unchanged at 4.75%.

In commodities, oil held within its recent range as expectations for fewer interest-rate cuts by the Federal Reserve next year boosted the dollar. Gold staged a partial recovery after tumbling more than 2% in the previous session.

US economic data calendar includes 3Q GDP, December Philadelphia Fed business outlook, initial jobless claims (8:30am), November Leading index, existing home sales (10am), December Kansas City Fed manufacturing activity (11am) and October TIC flows (4pm)

Market Snapshot

• S&P 500 futures up 0.4% to 5,894.50
• STOXX Europe 600 down 1.2% to 508.26
• MXAP down 1.6% to 180.90
• MXAPJ down 1.4% to 572.89
• Nikkei down 0.7% to 38,813.58
• Topix down 0.2% to 2,713.83
• Hang Seng Index down 0.6% to 19,752.51
• Shanghai Composite down 0.4% to 3,370.03
• Sensex down 1.2% to 79,248.34
• Australia S&P/ASX 200 down 1.7% to 8,168.22
• Kospi down 2.0% to 2,435.93
• German 10Y yield up 4 bps at 2.29%
• Euro up 0.6% to $1.0417
• Brent Futures little changed at $73.35/bbl
• Gold spot up 1.4% to $2,621.03
• US Dollar Index down 0.16% to 107.85

Top Overnight News

• A stopgap funding deal to keep the US government running collapsed following opposition from Trump and Elon Musk. The president-elect wants lawmakers to include an increase to the debt ceiling in the package — which needs to happen before the summer to avoid a default — so that it would be raised under Joe Biden’s watch. BBG
• Trump said he’s totally against stopgap bill, and instead he and JD Vance called for a temporary funding bill without “Democrat giveaways” combined with an increase in the debt ceiling; Congress should debate the debt limit now: Fox News
• The drive to force Justin Trudeau to step aside as Canadian PM gained momentum. About a third of the 153-person Liberal contingent in the House of Commons want him out, according to one lawmaker. BBG
• The yen sank more than 1% as BOJ Governor Kazuo Ueda cast doubt on the prospect of a January rate hike after the central bank stood pat. Inflationary trends are slow and rate-setters want a fuller picture on wages and Donald Trump’s policies, he said. BBG
• Chinese banks raised mortgage rates for the first time since 2021, according to research firm Data Motion. The average for buyers’ first homes in 42 big cities inched up to 3.08% in November from a record low of 3.05% in the previous month. BBG
• Sweden’s Riksbank lowers its policy rate by 25bp to 2.5% (as expected), but the forward guidance is tweaked in a modestly hawkish direction, with the central bank saying it would “carefully evaluate the need for future rate adjustments” given recent easing measures (it said it’s possible that just one 25bp reduction occurs in H1). Riksbank
• Norway’s Norges Bank kept its policy rate unchanged at 4.5% (as expected), but the forward guidance was somewhat dovish, with the central bank noting that “the time to begin easing monetary policy is soon approaching” (it said a rate reduction was likely to occur in March). Norges Bank
• The BOE left the key rate unchanged at 4.75% as the Monetary Policy Committee voted 6-3 in favor of keeping its benchmark interest rate unchanged. The BOE signaled it will keep easing gradually in 2025 as a growing minority of officials set aside evidence of lingering inflation to back an immediate cut in borrowing costs. BBG
• Israeli warplanes struck Houthi sites in Yemen’s capital and elsewhere in response to new missile attacks on Tel Aviv. BBG
• Russian President Putin says he has not spoken to US President-elect Trump in four years but is ready to talk to him.
• Morgan Stanley now expects the Fed to deliver two 25 bps rate cuts in 2025 (prev. forecast of three 25 bps cuts) following the December FOMC meeting, according to Reuters.
• Apple said Meta has made 15 requests for potentially far-reaching access to Apple’s technology, and it raises concerns about users’ privacy and security as it made more requests than other firms: Reuters.
• Apple is in talks with Tencent and ByteDance to integrate their AI models into iPhones sold in the Chinese market. RTRS
• Indonesian President Prabowo has reportedly approved Apple’s $1bln investment plan: BBG
• Teamsters launched the largest strike against Amazon in US history; workers to strike nationwide on Thursday: RTRS

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded with losses across the board amid the fallout from the hawkish Fed, as sentiment from Wall Street reverberated to the region. ASX 200 was pressured by its IT and gold sectors following the post-Fed tech downside and the slide in the yellow metal. Nikkei 225 pared some losses following the BoJ’s decision to maintain rates, but choppy trade was  seen thereafter ahead of Governor Ueda’s presser. Hang Seng and Shanghai Comp were both lower as China conformed to the broader post-Fed risk tone, with Fed Chair Powell also suggesting that some Fed members had taken a very preliminary step and incorporated conditional effects of coming policies in their projections – i.e. potential Trump tariffs.

Top Asian News

• BoJ’s comprehensive review of past monetary easing steps highlighted it was deemed appropriate for the bank to continue conducting monetary policy with the aim of achieving the price stability target of 2% in a sustainable and stable manner. The bank stated that no specific measures should be excluded at this point when considering the future conduct of monetary policy. Regarding the effectiveness of monetary easing, it was noted that the quantitative degree of its effects remains uncertain compared with conventional monetary policy measures. While monetary easing influenced inflation expectations to some degree, it was not sufficiently effective in anchoring inflation at 2%. In terms of its impact on interest rates and the economy, long-term interest rates were reduced by approximately 1ppt since 2016. Large-scale monetary easing contributed to GDP growth by an estimated 1.3% to 1.8%, while its effect on CPI was between 0.5 and 0.7ppts. Note, the policy review was initiated by Ueda when he took office in April 2023.
• Honda (7267 JT) and Nissan (7201 JT) talks to start as early as next week, according to Nikkei.
• HKMA cut its base rate by 25bps to 4.75%, as expected in lockstep with the Fed.
• South Korean Finance Minister said market-stabilising measures will be taken if volatility is deemed excessive; will prepare FX stability and liquidity measures in 2025 policy plan, according to Reuters.
• South Korean financial regulator said it has asked banks to flexibly adjust FX transactions and loan maturity for firms, according to Reuters.
• South Korea’s National Pension Service (NPS) and BOK to extend and expand their FX swap agreement, according to Reuters.
• Indonesia’s central bank said it is committed to stabilising the IDR in case of any excessive volatility, according to Reuters.
• Westpac now forecasts the RBNZ to cut the cash rate to 3.25% by May 2025 following the NZ GDP data.

European bourses began the session entirely in the red and have generally traversed worst levels throughout the morning, as traders react to the hawkish cut at the Fed which sparked considerable pressure in US stocks, in the prior trading day. European sectors are entirely in the red, with sentiment hit following the hawkish Fed decision. Optimised Personal Care fares better than peers, with Autos taking second spot. Technology is by far the clear underperformer today, with sentiment across chip-makers hit after Micron’s (-15.5% pre-market) guidance disappointed. US equity futures are modestly in positive territory, as the complex attempts to recoup some of the losses seen in the prior session after the hawkish cut delivered by the Fed, sent the S&P 500 tumbling by around 3%.

Top European News

• Riksbank Rate 2.50% vs. Exp. 2.50% (Prev. 2.75%); if the outlook for inflation/activity remains unchanged, the rate could be cut again during H1-2025 (reiteration). Riksbank’s Thedeen says they are somewhere near the neutral rate, this justifies going forward a little more carefully. If the situation is unclear, will wait with rate changes.
• Norwegian Key Policy Rate 4.50% (exp. 4.50%, prev. 4.50%); “the policy rate will most likely be reduced in March 2025”.
• ECB’s Simkus says “best to keep consistent pace toward neutral; economic environment to determine terminal rate; downward direction monetary policy is clear; 1.75% is below the neutral rate. Inflation risks are balanced for the next year.”

BoJ Statement:

• BoJ maintained its rate at 0.25% as expected, with an 8-1 vote; Board Member Tamura dissented, advocating for a 25bps hike to 0.50%. The central bank said inflation expectations were heightening moderately, and inflation was likely to reach a level generally consistent with the BoJ’s price target in the second half of the three-year projection period through fiscal 2026.
• However, uncertainty regarding Japan’s economic and price outlook remains high, the central bank said. BoJ highlighted the need to scrutinise FX and market movements, along with their impact on Japan’s economy and prices.
• BoJ said the impact of FX volatility on inflation could be greater than in the past due to changes in corporate wage and price-setting behaviour. Meanwhile, Japan’s economy was recovering moderately despite some weaknesses, with private consumption increasing.
• Little action was seen outside of Japanese assets; USD/JPY and JGB futures saw upside, Nikkei trimmed some earlier losses.

Ueda Press conference

• For the next rate hike need “one more notch” to decide on tightening. Want to see next year’s wage negotiation momentum.
• Hard to say if the January outlook report and various info are sufficient as “one more notch”.
• If they decide not to hike, will consider whether this decision is a safe one. A risk of falling behind the curve while waiting. Will consider the risks, if they were to decide to skip rate hike.
• Need more data on the wage outlook; needs a little bit more information on wage trends.
• Will need considerable time to see the full picture of wage hikes and Trump policies. Need to gauge the situation for quite a while.
• Large picture on wage trends will become clearer in March and April. Will have to combine other data to make rate decisions until then.
• In totality, Ueda’s remarks have a dovish and cautious skew with Ueda expressing a desire for “one more notch” to decide on tightening. Overall, the presser has increased the odds of rates being left unchanged at the January 24th meeting with focus on the March 19th gathering as details on Spring wage negotiations will have begun filtering through by then.

FX

• USD is currently giving back some of yesterday’s FOMC-induced gains which saw DXY take out the 22nd Nov 2024 high (108.09), topping out at 108.25. DXY has since returned to a 107 handle. As the dust settles on the Fed decision, around 2bps of loosening is priced for the Fed’s January decision with the next 25bps cut not priced until July, whilst around 36bps of cuts is priced by end-2025.
• EUR macro drivers are on the light side and as such impetus for EUR/USD is being mostly driven by the USD leg of the equation. EUR/USD is back on a 1.04 handle after slumping to a 1.0343 low in the aftermath of the FOMC. As for NY OpEx, there are a slew of notable clips due to roll off (details below).
• JPY is by the far the underperformer across the G10 FX complex. USD/JPY was already driven higher following the hawkish Fed announcement, reaching a 154.86 peak. This extended to 155.44 following the BoJ’s decision to keep rates unchanged. Thereafter at Governor Ueda’s press conference, despite some initial firming of the JPY (as Ueda flagged the need to look at financial and FX markets), JPY then sharply depreciated as Ueda struck a cautious tone on future rate hikes. (details in the BoJ section above).
• GBP near the top of the G10 leaderboard in the run-up to today’s BoE policy announcement which is expected to see the MPC hold rates at 4.75% via an 8-1 vote split on account of stubborn services inflation, elevated wage growth and a potential upcoming boost to growth from recent fiscal measures.
• Antipodeans are both firmer vs. the USD in today’s session but very much down on the week after being dealt a hammer blow by yesterday’s FOMC policy decision. AUD/USD made a fresh YTD low overnight at 0.6200 to hit its lowest level since October 2022. NZD/USD also hit a fresh YTD low overnight at 0.5609 to trade at its lowest level since October 2022. Softness in NZD was also exacerbated by soft GDP metrics overnight.
• EUR/SEK fell from 11.50 to an 11.4872 session low. SEK appreciation was in response to outside bets for 50bps unwinding (though, recent global hawkish action had already done this), phrasing around a “more tentative approach” to policy easing going forward and the elevated CPIF forecast for 2025.
• Following the Norges Bank announcement to keep rates unchanged (as expected), there was some modest two-way reaction seen in EUR/NOK. Initially, the NOK came under pressure on the explicit nod to March before paring given MPR adjustments; as the dust settles, EUR/NOK is back towards pre-release levels of 11.7680.
• PBoC set USD/CNY mid-point at 7.1911 vs exp. 7.3165 (prev. 7.1880)
• BCB announces spot Dollar auction for December 19th; to offer up to USD 3bln.

Fixed Income

• USTs continue to falter post-FOMC and now at a 108-26+ trough, just below Wednesday’s 108-27 base and at a contract low. Ahead, we look to the US quarterly PCE and GDP before Friday’s monthly metric ahead of blackout lifting and Fed speak potentially resuming. Amidst this, the 2yr, 5yr, 7yr announcement before a TIPS auction. The US yield curve is steepening and markedly so with the 10yr at a 4.53% peak, its highest since May when 4.69% printed, while the short-end is under pressure and the 2yr is pulling back from a 4.36% peak.
• JGBs caught a bid following BoJ Governor Ueda’s press conference, in which he largely held a dovish tone and remained cautious on future hikes, noting he is waiting for “one more notch” on the wage data front. Currently higher by around 21 ticks, after rising to a 142.51 peak earlier.
• Bunds were pressured, in-fitting with USTs as outlined above. Specifics for the bloc have been light, with focus thus far and ahead firmly on external drivers. Bunds down to a 133.79 trough overnight, for reference 132.00 is the contract low from November, but have since bounced back above 134.00 to a 134.23 peak taking impetus from JGBs.
• Gilts gapped lower by 69 ticks before moving below the 92.00 handle to a 91.87 base, which is another contract low. The BoE is set to announce is policy decision today, where it is widely expected to keep rates unchanged, so focus will lie on any potential forward guidance.

Commodities

• WTI and Brent are essentially flat; the complex came under post-FOMC, but has since attempted to recoup some of the losses as the Dollar strength fades a touch. Brent Feb 2025 currently at the today’s peak at USD 73.55/bbl.
• Gold is firmer, lifted off USD 2584/oz post-Fed lows as the USD comes off highs and the risk tone in Europe sours. In terms of resistance levels the 21-DMA resides at USD 2650/oz before the 50-DMA at USD 2670/oz.
• Base metals are in the red, alongside the slump in sentiment and the relatively strong Dollar; albeit, the USD strength has unwound a touch in the European morning. 3M LME copper has traversed the bottom end of the day’s USD 8,906.50-961.50/oz range thus far.
• Sinopec Energy Outlook said China’s petroleum consumption is expected to peak in 2027 at up to 800mln metric tons, according to Reuters.
• Indonesia is considering deep cuts to Nickel mining, according to Bloomberg; looking at reducing Nickel ore allowed to be mined in 2025 to 150mln tonnes

Geopolitics

• “Israel-Hamas hostage deal not imminent”, according to Al Jazeera citing Jerusalem Post.
• “IDF: Sirens sound in several areas of central Israel, including Tel Aviv”, according to Sky News Arabia.
• Senior Israeli official said IDF attacked in Sana’a (Yemen), according to Axios’ Ravid.
• Yemeni Houthi spokesperson posted “An important statement for the Yemeni armed forces in the coming hours.”, via X.
• “Arab media reported attacks in the area of the Yemeni capital Sana’a, the port of al-Hodeidah in the west of the country, and an oil facility in the Ras al-Issa area”, according to Kann News.
• “An adviser to the Houthis’ information ministry in Yemen: ‘The Israeli attacks will not go unanswered. We will attack facilities related to electricity and oil reservoirs deep inside the occupation entity'”, via Kan’s Kais on X.
• Ukrainian drone attack on Russia’s Rostov region starts fire at Novoshakhtinsk oil refinery, according to the regional governor.
• Swedish Police say they went on board the Yi Peng 3 vessel today at the invitation of Chinese authorities

US Event calendar

• 08:30: 3Q GDP Annualized QoQ, est. 2.8%, prior 2.8%
  • 3Q Personal Consumption, est. 3.6%, prior 3.5%
  • 3Q GDP Price Index, est. 1.9%, prior 1.9%
  • 3Q Core PCE Price Index QoQ, est. 2.1%, prior 2.1%
• 08:30: Dec. Initial Jobless Claims, est. 230,000, prior 242,000
  • Dec. Continuing Claims, est. 1.89m, prior 1.89m
• 08:30: Dec. Philadelphia Fed Business Outl, est. 2.8, prior -5.5
• 10:00: Nov. Home Resales with Condos, est. 4.08m, prior 3.96m
  • Nov. Existing Home Sales MoM, est. 3.0%, prior 3.4%
• 10:00: Nov. Leading Index, est. -0.1%, prior -0.4%
• 11:00: Dec. Kansas City Fed Manf. Activity, est. -1, prior -2
• 16:00: Oct. Total Net TIC Flows

DB’s Jim Reid concludes the overnight wrap

There might only be 6 days until Christmas, but markets still had time for another surprise yesterday, as a hawkish cut from the Fed saw the S&P 500 (-2.95%) post its biggest decline after a Fed meeting since 2001. The moves led to a significant cross-asset slump, with the 10yr Treasury yield (+11.5bps) closing above 4.5% for the first time since May, whilst the VIX index of volatility surged +11.75pts to 27.62pts, which is its highest since the market turmoil back in the summer. And that’s before we get onto the mounting likelihood of a US government shutdown, as well as a major selloff in Brazil amidst growing fiscal concerns there.

Starting with the Fed, they delivered a widely expected 25bp cut, taking the fed funds rate down to the 4.25-4.50% range. But aside from the decision itself, just about every other aspect leant in a more hawkish direction than expected. For instance, the latest dot plot only pencilled in 50bps of cuts for 2025, down from 100bps in September and less than the 75bps expected by consensus. Similarly, the long-run median dot moved up to 3.0%, whilst the inflation projections saw a visible upgrade, with 2025 PCE inflation now seen at 2.5% (vs. 2.1% before). Indeed, most FOMC members now see the risks to core PCE as tilted to the upside, and Cleveland Fed President Hammack voted against the rate cut altogether.

That hawkish tone was followed up by Chair Powell in the press conference, who said that the latest rate cut “was a closer call”, and they were “at a point at which it would be appropriate to slow the pace of rate cuts”. In particular, Powell repeatedly noted that they need to see more “progress on inflation” to cut rates further, and said they were “not going to settle” for inflation staying above 2%. Our US economists see yesterday’s meeting as reinforcing their baseline view that a skip at the January meeting will likely turn into an extended pause in 2025. See their full reaction here .

In terms of the market reaction, there was a sizeable repricing in rate expectations, with the rate priced in for the Fed’s December 2025 meeting up +14.5bps yesterday to 4.01%. In turn, that led Treasuries to sell off across the curve, with 2yr yields up +11.0bps to 4.35% and 10yr yields +11.5bps to 4.51%, their highest level since late May. In the equity space, the S&P 500 fell -2.95%, marking its worst Fed decision day since 2001, with all of its 24 industry groups lower on the day. That was driven by even bigger losses for the Magnificent 7 (-4.12%), and the small-cap Russell 2000 (-4.39%) underperformed as well. The notable beneficiary of the Fed’s hawkishness was the US dollar, with the dollar index up +1.00% and the euro closing below $1.04 for the first time in two years.

Whilst the Fed was dominating attention yesterday, investors have also been alert to the growing risks of a US government shutdown later this week. That came as Donald Trump and JD Vance said that they opposed the continuing resolution that House Speaker Mike Johnson had negotiated with Democrats, which would fund the government until March. Instead, they called for “a streamlined spending bill” and for Republicans in Congress to push for an increase in the debt ceiling before the end of Biden’s term. On Polymarket, that’s seen the likelihood of a government shutdown before year-end rise from 10% just 24 hours ago to 53% now. The bill would have kept funding going until mid-March, as funding is currently set to run out at the end of this week.

Overnight, there’s been no let up in the newsflow, with the Bank of Japan leaving its policy rate steady at 0.25%. It was an 8-1 vote, with Naoki Tamura voting for a 25bp hike given his view that “risks to prices had become more skewed to the upside”. However, the tone remained cautious generally, and the statement said that “there remain high uncertainties surrounding Japan’s economic activity and prices”. And with the Fed becoming more hawkish and the BoJ staying on hold, that’s seen the Japanese Yen weaken to 155.33 against the US Dollar this morning.

More broadly, equity markets in Asia have lost ground following the Fed’s decision, with declines for the Nikkei (-0.51%), the Hang Seng (-0.68%), the Shanghai Comp (-0.45%) and the KOSPI (-1.69%). Australian markets have seen a significant slump too, with their 10yr government bond yield up +13.1bps overnight, whilst the S&P/ASX 200 is down -1.70%. The one exception to this negative pattern is the CSI 300, which is up +0.13% this morning. And looking forward, US equity futures have stabilised after the Fed-induced decline yesterday, with those on the S&P 500 up +0.11%.

Elsewhere, the other main development yesterday was a deepening selloff in Brazilian markets. That’s been driven by concerns over the country’s deficit, which our economists see at 8% over the next couple of years, and that’s led in turn to a major slump in the currency. The government are seeking to push through some spending cuts, although lawmakers in lower house watered down some of the package on Tuesday, which added to questions about how much would actually get passed.

That backdrop led to significant losses for Brazilian assets yesterday, with further declines amidst the post-FOMC risk-off mood. The Brazilian Real declined -2.87% to an all-time low against the US Dollar, bringing its losses over 2024 so far to -22.9%. That was echoed across other asset classes, and the Ibovespa equity index fell -3.15% in its worst daily performance since November 2022. In the meantime, 10yr yields on local currency debt were up +45.6bps to their highest level since 2016, whilst those on the country’s USD government debt were up +30.2bps.

Looking forward, central banks will stay in the spotlight today, as the Bank of England will announce their latest decision at 12pm London time. In terms of the decision itself, they’re widely expected to keep rates unchanged, with Bank Rate staying at 4.75%. And looking forward, our UK economist doesn’t expect any changes to the key message, which is that a gradual removal of policy restraint is appropriate, while policy will need to stay restrictive for sufficiently long until inflation risks dissipate further. For more details, see his full preview here.

Ahead of the BoE’s decision, UK gilts remained under pressure, and the 10yr spread over bunds widened to 231bps. That’s its widest level since 1990, and comes after the November CPI showed a fresh pickup in inflation. For instance, headline inflation was up to an 8-month high of +2.6%, and core inflation also moved higher for a second month running to +3.5%. But even though the pickup was broadly expected, the moves cemented the view that the UK data was headed in a more stagflationary direction, and the 10yr gilt yield (+3.4bps) closed at a 4.56%, within 1bp of its one-year high seen in early November.

Elsewhere in Europe, markets put in a more robust performance before the Fed, with the STOXX 600 (+0.15%) picking up after four consecutive declines. That was echoed among the major equity indices, with modest gains for the CAC 40 (+0.26%) and the FTSE MIB (+0.25%), although the German DAX (-0.02%) lost a bit of ground. For sovereign bonds, the story was a similar one of modest rises in yields, with those on 10yr bunds (+1.5bps), OATs (+1.4bps) and BTPs (+1.8bps) all moving higher. However, both equity and bond futures are pointing lower in Europe after the Fed, with those on the DAX down -1.29% this morning.

Finally, there wasn’t much other data yesterday, although we did a mixed report on the US housing market. On the downside, housing starts fell to an annualised rate of 1.289m in November (vs. 1.345m expected), which is their weakest level in four months. But on the upside, building permits moved up to an annualised rate of 1.505m (vs. 1.430m expected), which is their strongest in nine months. With that in hand, the Atlanta Fed’s GDPNow estimate for Q4 ticked slightly higher, and now sees an annualised growth rate of 3.2%.

To the day ahead now, and one of the main highlights will be the Bank of England’s latest policy decision. Otherwise, US data releases include the weekly initial jobless claims, existing home sales for November, the Conference Board’s leading index for November, and the third estimate of Q3 GDP. Finally, we’ll get earnings releases from Nike and FedEx.