US futures staged a partial recovery on Thursday after the worst Fed day rout since the 2013 Taper Tantrum, suggesting the selloff after the Federal Reserve’s hawkish pivot was overdone, even as stock indexes in Europe and Asia retreated as equity markets caught up with post-Fed moves in the US. As of 8:00am, S&P futures advanced 0.5% following the US benchmark’s biggest lost for a scheduled Fed decision day since 2001. Nasdaq 100 contracts rose 0.4% even as chip leader Micron crashed 13% on disappointing guidance. 10Y yields rose again, hitting 4.53%, the highest level since May and nearly 100bps higher than the 2024 lows reached in September. The dollar retreated after soaring on Monday even as the yen cratered after the Bank of Japan left rates unchanged, disappointing a lot of generally clueless strategists who were expecting a hike. Oil and bitcoin also rebounded after sliding on Wednesday. Key events today include the latest GDP revision, initial and continuing claims, existing home sales as well as the October TIC flows data.
In premarket trading, Micron Technology tumbles 13% after its revenue forecast missed projections, hurt by sluggish demand for smartphones and personal computers. Baidu dropped 2% after Reuters reports that Apple is in talks with Tencent and Bytedance to integrate their AI models into iPhones sold in China. Here are some other notable premarket movers:
The Fed scaled back the number of 2025 cuts it sees from four to two as Powell said future easing would require fresh progress on inflation. The reaction interrupted this year’s stellar rally in US stocks, with S&P 500 still on course to notch more than 20% of gains due to optimism about artificial intelligence and the outlook for the economy under a Donald Trump administration. While the severity of Wednesday’ reaction showed that equity markets were less prepared for the Fed’s announcement, the shift implied that profits could be stronger than anticipated in the near term, said Florian Ielpo, head of macro research at Lombard Odier Investment Managers.
“What we have seen is a little cold water poured on what is otherwise a decent economy,” John Bilton, JPMorgan Asset Management’s head of global multi-asset strategy, told Bloomberg TV. “I am constructive about next year. If I’m a bull, I have got to love a healthy pullback.” Money markets are now pricing in fewer than two quarter-point reductions for the entirety of 2025, even less than what was implied in the Fed’s so-called dot plot on Wednesday. In the SOFR options market one large block trade placed Wednesday afternoon bet on the start of another hiking cycle next year.
Elsewhere in central banks, the Norges Bank stood pat while the Riksbank cut their policy rate by 25 bps, both as expected. The Norwegian krone and Swedish krona both held higher on the day. The pound dropped after the Bank of England's dovish hold.
In Europe, the Stoxx 600 dropped 1.2% after the surprisingly hawkish Fed messaging sparked the biggest rout in US stocks since early August. Semiconductor stocks fall after Micron Technology posted disappointing revenue forecast. Here are some of the biggest movers on Thursday:
Asian stocks recorded their biggest decline in over two month after the Federal Reserve dialed back expectations for rate cuts next year. The MSCI Asia Pacific Index fell as much as 1.7%, with TSMC, Samsung and Commonwealth Bank of Australia the biggest contributors to the decline. Benchmarks of South Korea and Australia were among the worst performers in the region. Indian stocks also dropped. China erased earlier declines amid expectations the government will maintain a loose policy in 2025.
“Investors need to be pretty agile, bob-and-weave as we always say,” Thomas Taw, head of APAC investment strategy at Blackrock, said in a Bloomberg TV interview. Interest rates are likely going to be higher for longer and the rest of market will take a little time to digest that, Taw said.
In FX, the Bloomberg Dollar Spot Index fell 0.1% after soaring on Wednesday; the yen tumbled 1.4% - just as we told our premium subscribers - after comments by BOJ Governor Kazuo Ueda cast doubt on whether the bank could hike interest rates in January, or even beyond that, instead signaling that more information is needed on wages and the policies of Donald Trump before making a decision. USD/JPY has topped 157, a level where the BOJ will have to start jawboning verbal intervention only this time nobody will believe it. In China, authorities ramped up support for the currency via its daily reference rate after the Fed’s caution over future rate cuts sent the offshore yuan to a fresh one-year low.
In rates, treasuries are mixed with the curve steeper as long-end yields rise an additional 3.5bp while front-end of the curve rallies as traders continue to digest Wednesday’s market reaction to the Fed policy announcement and revised dot-plot forecasts. The yield curve steepened further with 10-year borrowing costs rising another 1 bp to 4.52% while two-year yields pull back. Into the steepening move the 2s10s spread tops at the widest level since Sept. 26. Treasury 2-year yields richer by around 3bp on the day while 30-year yields rise around 3.5bp, steepening 2s10s and 5s30s spreads by 5.5bp and 4bp on the day; US 10-year yields trade around 4.535%, just off session highs and at cheapest levels since May. Gilts outperform Treasuries slightly after UK bonds rallied in the aftermath of Bank of England voted 6-3 to keep rates unchanged at 4.75%.
In commodities, oil held within its recent range as expectations for fewer interest-rate cuts by the Federal Reserve next year boosted the dollar. Gold staged a partial recovery after tumbling more than 2% in the previous session.
US economic data calendar includes 3Q GDP, December Philadelphia Fed business outlook, initial jobless claims (8:30am), November Leading index, existing home sales (10am), December Kansas City Fed manufacturing activity (11am) and October TIC flows (4pm)
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APAC stocks traded with losses across the board amid the fallout from the hawkish Fed, as sentiment from Wall Street reverberated to the region. ASX 200 was pressured by its IT and gold sectors following the post-Fed tech downside and the slide in the yellow metal. Nikkei 225 pared some losses following the BoJ's decision to maintain rates, but choppy trade was seen thereafter ahead of Governor Ueda's presser. Hang Seng and Shanghai Comp were both lower as China conformed to the broader post-Fed risk tone, with Fed Chair Powell also suggesting that some Fed members had taken a very preliminary step and incorporated conditional effects of coming policies in their projections - i.e. potential Trump tariffs.
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European bourses began the session entirely in the red and have generally traversed worst levels throughout the morning, as traders react to the hawkish cut at the Fed which sparked considerable pressure in US stocks, in the prior trading day. European sectors are entirely in the red, with sentiment hit following the hawkish Fed decision. Optimised Personal Care fares better than peers, with Autos taking second spot. Technology is by far the clear underperformer today, with sentiment across chip-makers hit after Micron’s (-15.5% pre-market) guidance disappointed. US equity futures are modestly in positive territory, as the complex attempts to recoup some of the losses seen in the prior session after the hawkish cut delivered by the Fed, sent the S&P 500 tumbling by around 3%.
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DB's Jim Reid concludes the overnight wrap
There might only be 6 days until Christmas, but markets still had time for another surprise yesterday, as a hawkish cut from the Fed saw the S&P 500 (-2.95%) post its biggest decline after a Fed meeting since 2001. The moves led to a significant cross-asset slump, with the 10yr Treasury yield (+11.5bps) closing above 4.5% for the first time since May, whilst the VIX index of volatility surged +11.75pts to 27.62pts, which is its highest since the market turmoil back in the summer. And that’s before we get onto the mounting likelihood of a US government shutdown, as well as a major selloff in Brazil amidst growing fiscal concerns there.
Starting with the Fed, they delivered a widely expected 25bp cut, taking the fed funds rate down to the 4.25-4.50% range. But aside from the decision itself, just about every other aspect leant in a more hawkish direction than expected. For instance, the latest dot plot only pencilled in 50bps of cuts for 2025, down from 100bps in September and less than the 75bps expected by consensus. Similarly, the long-run median dot moved up to 3.0%, whilst the inflation projections saw a visible upgrade, with 2025 PCE inflation now seen at 2.5% (vs. 2.1% before). Indeed, most FOMC members now see the risks to core PCE as tilted to the upside, and Cleveland Fed President Hammack voted against the rate cut altogether.
That hawkish tone was followed up by Chair Powell in the press conference, who said that the latest rate cut “was a closer call”, and they were “at a point at which it would be appropriate to slow the pace of rate cuts”. In particular, Powell repeatedly noted that they need to see more “progress on inflation” to cut rates further, and said they were “not going to settle” for inflation staying above 2%. Our US economists see yesterday’s meeting as reinforcing their baseline view that a skip at the January meeting will likely turn into an extended pause in 2025. See their full reaction here .
In terms of the market reaction, there was a sizeable repricing in rate expectations, with the rate priced in for the Fed’s December 2025 meeting up +14.5bps yesterday to 4.01%. In turn, that led Treasuries to sell off across the curve, with 2yr yields up +11.0bps to 4.35% and 10yr yields +11.5bps to 4.51%, their highest level since late May. In the equity space, the S&P 500 fell -2.95%, marking its worst Fed decision day since 2001, with all of its 24 industry groups lower on the day. That was driven by even bigger losses for the Magnificent 7 (-4.12%), and the small-cap Russell 2000 (-4.39%) underperformed as well. The notable beneficiary of the Fed’s hawkishness was the US dollar, with the dollar index up +1.00% and the euro closing below $1.04 for the first time in two years.
Whilst the Fed was dominating attention yesterday, investors have also been alert to the growing risks of a US government shutdown later this week. That came as Donald Trump and JD Vance said that they opposed the continuing resolution that House Speaker Mike Johnson had negotiated with Democrats, which would fund the government until March. Instead, they called for “a streamlined spending bill” and for Republicans in Congress to push for an increase in the debt ceiling before the end of Biden’s term. On Polymarket, that’s seen the likelihood of a government shutdown before year-end rise from 10% just 24 hours ago to 53% now. The bill would have kept funding going until mid-March, as funding is currently set to run out at the end of this week.
Overnight, there’s been no let up in the newsflow, with the Bank of Japan leaving its policy rate steady at 0.25%. It was an 8-1 vote, with Naoki Tamura voting for a 25bp hike given his view that “risks to prices had become more skewed to the upside”. However, the tone remained cautious generally, and the statement said that “there remain high uncertainties surrounding Japan’s economic activity and prices”. And with the Fed becoming more hawkish and the BoJ staying on hold, that’s seen the Japanese Yen weaken to 155.33 against the US Dollar this morning.
More broadly, equity markets in Asia have lost ground following the Fed’s decision, with declines for the Nikkei (-0.51%), the Hang Seng (-0.68%), the Shanghai Comp (-0.45%) and the KOSPI (-1.69%). Australian markets have seen a significant slump too, with their 10yr government bond yield up +13.1bps overnight, whilst the S&P/ASX 200 is down -1.70%. The one exception to this negative pattern is the CSI 300, which is up +0.13% this morning. And looking forward, US equity futures have stabilised after the Fed-induced decline yesterday, with those on the S&P 500 up +0.11%.
Elsewhere, the other main development yesterday was a deepening selloff in Brazilian markets. That’s been driven by concerns over the country’s deficit, which our economists see at 8% over the next couple of years, and that’s led in turn to a major slump in the currency. The government are seeking to push through some spending cuts, although lawmakers in lower house watered down some of the package on Tuesday, which added to questions about how much would actually get passed.
That backdrop led to significant losses for Brazilian assets yesterday, with further declines amidst the post-FOMC risk-off mood. The Brazilian Real declined -2.87% to an all-time low against the US Dollar, bringing its losses over 2024 so far to -22.9%. That was echoed across other asset classes, and the Ibovespa equity index fell -3.15% in its worst daily performance since November 2022. In the meantime, 10yr yields on local currency debt were up +45.6bps to their highest level since 2016, whilst those on the country’s USD government debt were up +30.2bps.
Looking forward, central banks will stay in the spotlight today, as the Bank of England will announce their latest decision at 12pm London time. In terms of the decision itself, they’re widely expected to keep rates unchanged, with Bank Rate staying at 4.75%. And looking forward, our UK economist doesn’t expect any changes to the key message, which is that a gradual removal of policy restraint is appropriate, while policy will need to stay restrictive for sufficiently long until inflation risks dissipate further. For more details, see his full preview here.
Ahead of the BoE’s decision, UK gilts remained under pressure, and the 10yr spread over bunds widened to 231bps. That’s its widest level since 1990, and comes after the November CPI showed a fresh pickup in inflation. For instance, headline inflation was up to an 8-month high of +2.6%, and core inflation also moved higher for a second month running to +3.5%. But even though the pickup was broadly expected, the moves cemented the view that the UK data was headed in a more stagflationary direction, and the 10yr gilt yield (+3.4bps) closed at a 4.56%, within 1bp of its one-year high seen in early November.
Elsewhere in Europe, markets put in a more robust performance before the Fed, with the STOXX 600 (+0.15%) picking up after four consecutive declines. That was echoed among the major equity indices, with modest gains for the CAC 40 (+0.26%) and the FTSE MIB (+0.25%), although the German DAX (-0.02%) lost a bit of ground. For sovereign bonds, the story was a similar one of modest rises in yields, with those on 10yr bunds (+1.5bps), OATs (+1.4bps) and BTPs (+1.8bps) all moving higher. However, both equity and bond futures are pointing lower in Europe after the Fed, with those on the DAX down -1.29% this morning.
Finally, there wasn’t much other data yesterday, although we did a mixed report on the US housing market. On the downside, housing starts fell to an annualised rate of 1.289m in November (vs. 1.345m expected), which is their weakest level in four months. But on the upside, building permits moved up to an annualised rate of 1.505m (vs. 1.430m expected), which is their strongest in nine months. With that in hand, the Atlanta Fed’s GDPNow estimate for Q4 ticked slightly higher, and now sees an annualised growth rate of 3.2%.
To the day ahead now, and one of the main highlights will be the Bank of England’s latest policy decision. Otherwise, US data releases include the weekly initial jobless claims, existing home sales for November, the Conference Board’s leading index for November, and the third estimate of Q3 GDP. Finally, we’ll get earnings releases from Nike and FedEx.