Daily Global Macro Morning Note
Market Turbulence: Fed's Hawkish Cut Sparks Volatility Amid Economic Uncertainty and Corporate Earnings Reports
Quote of the Day:
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Wake-Up Call:
The global financial landscape is experiencing significant shifts as 2024 draws to a close, with central bank decisions, economic indicators, and corporate developments shaping market dynamics.
Central Bank Actions and Market Reactions
The Federal Reserve implemented a widely anticipated "hawkish cut," reducing the benchmark interest rate by 25 basis points to a range of 4.25% to 4.50%. This move, coupled with revised forecasts, has led to market recalibrations and volatility in U.S. Treasuries. The Fed's updated Summary of Economic Projections now anticipates only two quarter-percentage-point cuts by the end of 2025, down from the four cuts projected in September.
Fed Chair Jerome Powell emphasized a cautious approach to further adjustments, stating that the central bank would carefully assess incoming data and the evolving outlook[. This stance has prompted a reassessment of monetary easing expectations for the year ahead.
In response to the Fed's decision, U.S. stock markets experienced significant declines. The S&P 500 and other major indexes closed sharply lower, with mega-cap technology stocks like Tesla and Amazon facing substantial losses.
Other central banks have also made notable decisions:
The Bank of Japan maintained its policy rate, leading to a further decline in the yen against the dollar.
Sweden's Riksbank lowered interest rates by 25 basis points to 2.5%.
Norway's central bank kept its key policy rate unchanged at 4.5% but hinted at potential easing in March.
Economic Indicators and Data Releases
Recent economic data has painted a mixed picture of the U.S. economy:
- Housing starts unexpectedly fell 1.8% month-over-month to 1.289 million in November, below expectations.
- Building permits rose 6.1% month-over-month to a 9-month high of 1.505 million in November, surpassing expectations.
- The U.S. Q3 current account deficit reached a record -$310.9 billion, wider than anticipated.
Investors are eagerly awaiting several key economic releases:
- The final Q3 GDP estimate, expected to show 2.8% growth.
- The U.S. Philadelphia Fed Manufacturing Index for December, with economists forecasting a figure of 2.9.
- U.S. Existing Home Sales data for November, projected at 4.09 million.
- Initial Jobless Claims, estimated to be 229,000.
- The Conference Board's Leading Economic Index, expected to show a 0.1% month-over-month decline.
Corporate Developments and Earnings
Corporate news continues to influence market sentiment:
- Nike's newly appointed CEO, Elliott Hill, is set to face his first earnings call, with investors eager for insights into the company's strategic direction.
- Micron Technology experienced a sharp premarket decline of over 14% following a disappointing revenue forecast.
- Jabil Inc. emerged as a top gainer on the S&P 500 after exceeding quarterly expectations and raising its full-year guidance.
- General Mills revised its earnings outlook downward, exacerbating investor concerns.
Other notable companies scheduled to report quarterly results include FedEx, Accenture, Cintas, and Darden Restaurants.
Global Market Outlook
As markets digest these developments, investor sentiment remains fragile. The cautious stance of central banks, geopolitical uncertainties, and upcoming corporate earnings reports will shape the near-term market trajectory. European markets are tracking losses in Asia and the U.S., with technology stocks among the worst performers.
In the cryptocurrency market, Bitcoin faced a momentary dip but has since reclaimed the six-figure mark, reflecting the volatile nature of digital assets amidst changing monetary policies.
As 2024 comes to a close, market participants brace for a potentially turbulent finish to the year, underscored by heightened volatility and shifting policy dynamics across the global financial landscape.
Chart of the Day:
USD/YEN
The USD/JPY pair is poised for continued volatility in 2025, driven by monetary policy divergence and geopolitical factors. The Federal Reserve's cautious approach to rate cuts and the Bank of Japan's reluctance to implement significant rate hikes are expected to be key drivers of the currency pair's movement.
Technical Analysis
USD/JPY remains in a long-term uptrend based on the weekly chart:
- The pair is trading above the 50-week Simple Moving Average (SMA)
- The Relative Strength Index (RSI) is above 50
- The 200-week SMA is clearly trending upward
Key levels to watch:
Resistance:
1. 156.97 (late 2024 peak)
2. 161.81 (yearly high)
3. 170.43 (near the 170 round level and 138.2% Fibonacci extension)
Support:
1. 147.54 (higher low set in late 2024)
2. 139.73 (yearly low)
3. 136.72
4. 127.15 (far below)
Outlook for 2025
The year is expected to start with a downward movement in USD/JPY, influenced by political changes in the U.S. and market expectations of continued Fed rate cuts. However, the outlook turns bullish from spring onward, driven by several factors:
1. Potential trade deals under the new U.S. administration, which could stabilize global trade and weigh on the safe-haven Yen
2. A more hawkish Fed policy stance in the latter half of the year
3. Growing disillusionment with the Bank of Japan's lack of significant rate hikes
While geopolitical uncertainties may introduce volatility, the overall trend is expected to favor USD strength against the Yen as the year progresses.
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