Mild risk off as markets eye Fed meeting

* FOMC set to cut rates by 25bps at its final meeting of 2024

* First pick up in UK wage growth in a year dampens rate cut bets

* Canada inflation eases to 1.9%, backing BoC’s dovish stance

* Dollar steady, stocks off, yields steady into Fed meeting

FX: USD is tracking sideways this week as it awaits the last FOMC meeting of the year. We’ve consistently highlighted long-term resistance at 107.34. Initial support lies at 106.51 and the December low at 105.42. US retail sales were mixed.

EUR continues to trade above 1.05 and the key long-term 1.0448 support level. Weak German IFO business survey data pointed to businesses becoming more worried about the country’s growth outlook.  The ZEW figures of investor confidence showed a jump in expectations. Is there hope that new February elections will resolve the current grim political backdrop?

GBP picked up for a second straight day rebounding from the sell-off late last week. Prices need to get beyond the early December top at 1.2811 to slow the long-term downtrend. Hot UK wage growth caused rate cut bets in March to be pushed out to May. There’s less than a two in three chance of a 25bps move in February.

USD/JPY turned lower as the yen outperformed on the day. The BoJ meeting isn’t expected to produce any fireworks, though there are some economists looking for a rate hike.

AUD sunk to fresh cycle lows and below the August spike bottom at 0.6347. Commodity dollars were at the bottom of the major pile. Next major support resides around 0.63 from the lows in October last year. USD/CAD soared higher again as negative domestic political news hurt the loonie. The Finance Secretary’s shock exit clouds the outlook even more ahead of Trump 2.0.

US stocks: The S&P500 closed down 0.39% at 6,050. The tech-heavy Nasdaq settled 0.43% lower at 22,001. The Dow finished at 43,449, off 0.61%. Sectors were predominantly lower, led by losses in Industrials, Energy and Financials while Consumer Discretionary, Consumer Staples and Healthcare were the relative outperformers. Apple and Tesla again made yet more record highs while Nvidia fell further from its all-time top. Disappointing core retail sales and other minor tier data caused the Dow to suffer its worst losing streak in 46 years.

Asian stocks: Futures are mixed. Asian equities traded mixed after an initial uplift from record highs on the Nasdaq. The ASX 200 firmed with banks outperforming. The Nikkei 225 trimmed gains as traders await the BoJ and FOMC meetings. China indices were also muted ahead of the big risk events.

Gold sold off below the 21-day SMA at $2652. Support lies around $2620.

Day Ahead – UK CPI, FOMC Meeting

Expectations are for UK headline inflation to rise two-tenths to 2.5% due to base effects. Core CPI is seen rising three-tenths to 3.6% which is more than the MPC forecast. This is due in part to an uptick in services inflation that is seen steady at an elevated 4.9%. Travels and rents have been sticky and will likely be responsible for this measure being stuck around 5% through the winter. That should keep the BoE standing pat on rates until at least February.

For the Fed, a 25bps rate cut is fully priced in so focus will be on the fresh dot plot, projections and Chair Powell’s tone in the press conference. Three 25bps rate reductions are predicted by consensus for the median 2025 dot plot, one less than the September dot plot. Growth and inflation forecasts are expected to be revised higher. Powell will probably stay away from strong signalling about January, and any incoming Trump policies.

Chart of the Day – Nasdaq pauses at record highs

A ‘hawkish’ rate cut is seen as likely. That means the Fed should signal fewer cuts in 2025. It also could result in risk assets like equities seeing renewed volatility. A very hawkish tone could put downward pressure on equity valuations, especially growth stocks that are more sensitive to higher rates. Investors might consider rotating into defensive sectors like utilities and consumer staples in the Dow if the Fed signals a slower pace of cuts.

The Nasdaq is up 32% year-to-date and made fresh all-time highs. AI and US exceptionalism have bid up stocks with a continued handful of tech titans driving the tech-laden index. A more receptive tone to rate cuts would likely see new highs.

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.