We’re seeing some caution in the markets this week and that is particularly true today, with Europe trading broadly flat and US futures pointing to a similar start on Wall Street.
The final Fed meeting of the year could also be the most eventful, with the central bank likely to acknowledge it’s done with tightening and even signal rate cuts next year. The question is how many, with markets now pricing in four starting in May.
The interest rate decision itself will almost certainly be straightforward – on hold – but with new economic forecasts, the dot plot, a statement, and the press conference to follow, there could be fireworks.
Investors love a Santa rally to see the year out and whether we do or not may well hang on how the central bank positions itself. Any acknowledgment of rate cuts next year could be well received, although only one may receive a cool response as that would suggest policymakers view it as coming very late in the year.
Traders may well shake on two as that would point to a third-quarter rate cut which seems odd as that still wouldn’t be nearly as aggressively as markets are positioned but it’s unlikely the Fed will pivot to the extent that it aligns with the very optimistic expectation currently priced into the markets. That isn’t to say they won’t get there over the next few months.
UK at risk of recession after disappointing October GDP reading
The UK economy got the fourth quarter off to a bad start, contracting by 0.3% in October from the month before. The UK economy is struggling under the pressure of higher interest rates and it seems wet weather compounded those challenges for retailers, encouraging consumers to stay indoors.
There’s every chance spending bounces back in November and December, with the weather being less of a deterrent and households spending more ahead of the festive period. That said, they may well be looking at a more slimmed-down Christmas this year after two years of high inflation which could leave the economy at risk of recession.
Oil near 2023 lows amid economic pessimism
Oil prices are relatively flat on the day after coming under pressure again earlier in the session. They fell heavily again on Tuesday, with Brent losing close to 4%. Concerns around the global economy next year, a weak commitment to output cuts from OPEC+ and higher output elsewhere, including record levels in the US, is weighing heavily on prices into year-end, with Brent and WTI now not far from the lows of earlier this year.
Gold falls below $2,000 ahead of the Fed
Gold traders have seemingly not been too pleased with the US jobs and inflation data, pushing the yellow metal back below $2,000 ahead of the Fed announcement. This comes just over a week after it soared to record highs, albeit buoyed by very thin trade. It’s since given back 50% of the gains from the early October lows to last week’s new record high which highlights how optimistic traders were and how some of that enthusiasm has since faded.
