Fed expected to keep rates on hold
US equity markets partially rebounded yesterday after Monday’s tech-led fall. Bond yields edged higher, having fallen during the sell-off in stocks, while the Japanese yen and Swiss franc gave up most of their (modest) safe-haven gains. The euro is little changed against the dollar from yesterday morning, trading at around $1.0425, while the pound is a touch firmer against both the dollar and the euro at $1.2450 and £0.8375 respectively. The focus today is on the Fed. It is expected to keep rates on hold, so the interest will be in what it has to say about the outlook for policy over the coming months.
In equity markets. the Nasdaq closed 2% higher, after losing around 3% on Monday, and the S&P 500 rose by about 1%, while European stocks also rebounded, gaining almost 1%. In government bond markets, yields edged higher, after falling quite sharply on Monday, though they are nudging down at the start of play today.
The latest ECB Bank Lending Survey shows Euro area banks reported a renewed tightening of credit standards for loans to businesses in Q4 2024, partly driven by higher perceived risks related to the economic outlook. Credit standards for loans to households for house purchase were unchanged, after easing over the previous three quarters, while there was a further tightening of standards for consumer credit. On the demand side, firms’ demand for loans continued to increase slightly in Q4 but remained weak overall. Demand for housing loans continued to increase strongly, while there was a slight increase in consumer credit demand.
Consumer confidence in the US fell for a second month running in January according to the latest Conference Board survey, partly reflecting a deterioration in respondents’ assessment of current labour market conditions for the first time since September. Overall though, as the Conference Board notes, consumer sentiment has been moving sideways in a relatively stable, narrow range since 2022.
The Fed is widely expected to keep interest rates on hold today (at 4.25%-4.5%), having lowered its key policy rate by 100bps over its final three meetings of 2024, with the continuing resilience of the US economy as well as the potential impact of Trump’s economic policies seen limiting the room for further cuts in 2025. The market is currently pricing circa 50bps worth of policy easing this year with another reduction in rates not seen until June. Given rates are expected to stay on hold, market attention will focus on what the Fed signals about the outlook for policy over the next few months.
It is relatively quiet on the economic front with money supply/credit growth for December in the Euro area and the trade balance (also for December) in the US the main releases of note.