By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Markets largely trod water yesterday with fresh catalysts distinctly lacking, as focus turns towards what’s likely to be a hawkish cut from the FOMC this evening.
WHERE WE STAND – Trading conditions on the day before an FOMC meeting are never especially exciting. Trading conditions on the day before the December FOMC meeting, when everyone is eagerly waiting to start their Christmas holidays, are even worse.
My thoughts on what Powell & Co might do later on are below, but suffice to say there’s not much to cover in terms of yesterday’s market action before getting to that preview. Unsurprisingly, trade was very tentative indeed, with participants lacking conviction across the board, while there was also a distinct lack of fresh fundamental developments to drive things either.
We did, at least, get the latest US JOLTS job openings report which pointed to vacancies having stood at, as near as makes no difference, 7.67mln in both September and October. That data, though, is of course rather stale at this stage.
There were also some remarks from President Trump doing the rounds where, besides another rant about the need for lower interest rates, the most notable comment was a nod to potentially further reducing tariffs on certain items in an effort to lower prices. I’d wager that we’ll see a fair bit more of this next year, as the midterms approach, and with affordability likely being a key electoral issue.
In fact, this speaks back to the broader ‘Trump put’ structure I’ve mentioned a few times, in that the Admin will have extra incentive to ensure solid growth, and some degree of disinflation, before the midterms. In turn, that incentive is likely to reduce left tail macro risks, and is also likely to provide solid support to risk assets over the next 12 months or so.
Anyway, back to yesterday, where markets didn’t do especially much at all, with pretty much everything treading water in anticipation of the FOMC later on today. On the whole, my bias remains to be long of equities, and long of gold, with my bullish USD view still on the back-burner until the new year. I see little reason for whatever the Fed do tonight to change that view, in all honesty.
LOOK AHEAD – Right then, here we are, the final ‘Fed Day’ of 2025.
The FOMC are set to deliver a third straight 25bp cut, lowering the target range for the fed funds rate to 3.50% – 3.75%, as policymakers continue to remove policy restriction in an effort to support the stalling US labour market, and as tariff-induced price pressures appear less intense than had been feared. Such a decision, though, is unlikely to be a unanimous one; as many as five policymakers may dissent in favour of holding rates steady (the record number of dissents at a meeting is four, in 1983), while Governor Miran may again vote for a larger 50bp reduction, albeit only if his vote isn’t the marginal one.
Accompanying the decision will be the Committee’s updated policy statement which is likely to signal an increased degree of data-dependency into the new year. This could be achieved relatively easily, by the tweaking guidance to describe the ‘extent and timing’ of additional adjustments to the fed funds rate.
The updated SEP will also be in focus, especially the ‘dot plot’, with no major changes to growth or inflation forecasts on the horizon. The median ‘dot’ in September pointed to just one 25bp cut being delivered next year, though just one policymakers above that median dovishly revising their expectation would see the median pencil in two cuts for next year, while two policymakers below the median hawkishly revising their call would drag the median higher, pointing to no change in 2026. Hence, there is the potential for significant gyrations in market-based rate expectations post-event, on just a handful of Committee members marginally revising their future policy path.
Of course, Chair Powell’s post-meeting press conference will be watched closely too, particularly in terms of forward guidance. Last time out, Powell noted that a cut at the following meeting was ‘far from’ a foregone conclusion, which sparked a significant hawkish repricing of policy expectations. This time, the key things to watch will be whether Powell still views policy as restrictive, as well as whether the current stance is described as being in a ‘good place’, which would mirror the language used earlier in the year, to indicate a prolonged period on hold.
Besides the FOMC, today, the Bank of Canada are set to stand pat, ECB President Lagarde is set to speak, and earnings are due from both Oracle (ORCL) and Adobe (ADBE). All of that, though, will clearly be overshadowed by whatever Powell & Co get up to.
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