Markets tread water ahead of Fed
Markets generally treaded water yesterday ahead of the Fed’s interest rate announcement later today. In FX, the dollar was marginally firmer, gaining ground against most of the main currencies, though it has given back some of this overnight. EURUSD is hovering around $1.1650 this morning, while GBPUSD is trading at $1.3325 (having dipped below $1.33 for a time yesterday). EURGBP remains within its relatively narrow range of the past week or so, trading at about £0.8740. Regarding the Fed, it looks set to cut the policy rate by 25bps for a third time since September, to 3.5%-3.75%, bringing the cumulative reduction since September 2024 to 175bps. It may though strike a cautious note regarding the pace and extent of any further cuts, which could lend some support to the dollar.
US government bond yields nudged up a little ahead of the Fed’s rate decision, while Euro area yields ended a touch lower, partially reversing some of Monday’s spike in yields. UK bonds outperformed modestly, with yields about 3-4bps lower across the curve. In equity markets, European stocks closed marginally in the red, while the main US indices finished flat to slightly lower on the day.
Bank of England MPC members remain divided on interest rates ahead of the December 18th monetary policy meeting judging by their comments at a parliamentary hearing yesterday, where the ‘usual suspects’ on both sides argued for and against lowering rates. This suggests next week’s decision will be another close call, though the market more or less fully expects rates to be cut by 25bps (to 3.75%).
Yesterday’s labour market data in the US were a mixed bag. While the number of job openings rebounded in September-October, the pace of job hiring slowed and job layoffs rose for a second month running in October (albeit still remaining relatively low). Overall though, labour market conditions have softened recently, evident in a gradual rise in the unemployment rate, hence today’s likely Fed rate cut will be to address downside risks to employment.
The Fed meeting is the main focus for markets today. The Bank of Canada also announces its latest policy decision, with interest rates expected to be kept on hold. On the economic data front, the Employment Cost Index (ECI) for Q3 and the Federal budget balance for November are both published in the US, with little or nothing of note scheduled elsewhere.