By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – The FOMC delivered a hawkish 25bp cut yesterday, with Chair Powell setting a marginally higher bar for further cuts in the near-term. Today, the SNB are set to stand pat, with US jobless claims the data highlight.
WHERE WE STAND – The final FOMC meeting of the year was yesterday’s main focus, and brought with it very little by way of significant surprises.
In short – the Committee delivered a third straight 25bp cut, albeit one accompanied by three dissents, while the ‘dot plot’ again pointed to a median expectation of one further such cut being delivered in each of 2026 and 2027. Meanwhile, the policy statement was hawkishly tweaked, to indicate that policymakers will consider the ‘extent and timing’ of additional rate adjustments, and balance sheet expansion has also resumed, in a purely technical measure to ensure that funding markets continue to function smoothly.
Chair Powell stuck to this ‘hawkish cut’ vibe at the post-meeting press conference, seeking to move the bar for another cut marginally higher, in noting that the fed funds rate now stands within a range of ‘plausible estimates’ for the neutral rate, while also noting that the Committee are now ‘well positioned’ to ‘wait and see’ how the economy evolves from here. None of this, to be clear, rules out another cut, and the direction of travel for rates clearly remains lower, however we’re now at the stage where the evolution of incoming labour market data between now and the January confab will determine whether another cut will come in Q1, or perhaps later next year.
In any case, the fundamental monetary policy backdrop remains the same – the fed funds rate is on its way back to neutral (3ish%), and the balance sheet has bottomed out at neutral (20ish% of GDP). As I’ve said before, and at risk of repetition, that is about as bullish a cocktail for risk assets as you can imagine. Add to that FOMO/FOMU flows into year-end, the typically strong positive seasonality that we see into year-end, plus sizeable corporate buyback flows, and my view is still that ‘path of least resistance’ continues to lead to the upside. I remain quietly confident that spoos will print 7,000 before the year is done.
Anyway, as for markets yesterday, stocks did indeed gain ground on Wall Street, before a wobble after hours on the back of Oracle’s weaker than expected cloud revenue print, while Treasuries rallied across the curve, and the dollar lost ground against most peers.
That Treasury move, to me, looked like dip buyers finally stepping in to lock-in yields (4.20% on the 10-year, and 4.80% on the 30-year), now that the event risk of the FOMC has been navigated. Actually, on that, I’d wager that many participants will now be throwing in the towel for the year, meaning conditions could thin out fairly significantly from here on in, despite there being both a US jobs report, and inflation figures, to navigate next week.
As for the buck, that move was one that went almost tick-for-tick with the rally in Treasuries, though did nonetheless take the DXY towards a test of its 100-day moving average. A downside break there probably opens the door to further declines towards the 98 figure, which some ‘back of the envelope’ maths puts cable at 1.3450, the EUR at 1.1750, the JPY at 154, and USDCAD at 1.37. I’m still sticking with my ‘US exceptionalism’-driven dollar bull case into next year, though those sort of levels – especially in cable! – might tempt me to get involved a little bit sooner than planned.
LOOK AHEAD – After the ‘fun’ of the FOMC yesterday, a lighter docket now lies in store.
The Swiss National Bank (SNB)’s final decision of the year highlights proceedings, with policymakers set to hold rates steady, at 0.00%. Focus, as usual with the SNB, will hence fall largely on policymakers’ view as to the current valuation of the CHF, in addition to whether there is any degree of preparedness to lower rates back into negative territory in the future.
Elsewhere, the weekly US jobless claims stats are due, with initial claims set to tick marginally higher, having been depressed as a result of Thanksgiving last week – that said, neither the initial nor continuing claims prints pertain to either the November or December NFP survey weeks. Also on the docket today, the US sells 30-year Treasuries, BoE Governor Bailey is set to speak, and AI bellwether Broadcom (AVGO) report earnings after the close.