A look at the day ahead in U.S. and global markets by Samuel Indyk
The stellar year for U.S. stock markets took a bit of a breather on Thursday, perhaps expected after a rally that has led the Nasdaq to 20,000 for the first time this week and the S&P 500 to another new record high.
Gains have been driven by optimism over artificial intelligence and rate-cut expectations, with attention now turning to the Federal Reserve’s last policy meeting of the year, beginning next Tuesday.
The central bank is likely to follow up November’s 25 basis point rate cut with another of the same magnitude, taking the fed funds rate to 4.25%-4.5%.
But where the Fed plans to take rates in 2025 is what will interest markets more.
Donald Trump’s election victory last month has left investors with a lot of questions about the economy in 2025.
Will Trump push ahead with blanket tariffs on U.S. imports? Will these tariffs be inflationary? And how will the Fed react?
For now, markets are pricing in just two more quarter-point cuts in 2025, assuming the Fed lowers rates on Wednesday.
Should the Fed lower interest rates next week, it will mean a total 100 basis points of easing this year – the same amount delivered by the European Central Bank (ECB) in 2024 after it lowered borrowing costs on Thursday for the fourth time.
But while ECB president Christine Lagarde left the door open for more rate cuts next year, the ECB president refused to commit to a particular rate path, leaving some investors scratching their heads.
Markets have been betting that the euro zone’s central bank would cut rates at every meeting through the first half of next year, possibly even faster, with inflation back near target and growth remaining sluggish.
Those expectations were little changed after Thursday’s decision, with the deposit rate seen falling to roughly 1.75% by the end of next year.
The ECB has not been the only show in town this week, with the Swiss and Canadian central banks each opting for jumbo 50 basis point rate cuts.
Next (LON:NXT) week, as well as the Fed, the central banks of Sweden, Norway, Britain and Japan will also announce their policy decisions.
The global interest rate picture has left the dollar index on track for a 1% gain this week, its biggest weekly jump in a month and ninth positive week in 11. The U.S. currency has risen against all major peers this year.
The S&P 500 is within touching distance of recent peaks and on track for annual gains of more than 20% for the second year in a row, with futures on Friday pointing to a firmer open, led once again by the tech-heavy Nasdaq.
This time it’s Broadcom (NASDAQ:AVGO) leading the way higher after the semiconductor company forecast quarterly revenue above Wall St estimates on Thursday after-hours, predicting booming demand for its custom AI chips. Shares are up 14% pre-market.
Key developments that should provide more direction to U.S. markets later on Friday:
* U.S. import and export prices
