INTEREST RATES
Futures are higher at the front end of the yield curve and lower at the long end of the yield curve.
Yesterday the December U.S. Treasury bond futures declined to the lowest level since November 2023.
The yield on the 10-year U.S. Treasury note remained near 4.60% and is close to a seven-month high as markets continue to assess the extent of interest rate cuts the Federal Reserve may implement in 2025.
Recent declines in futures, especially at the long end of the yield curve, are due to the hawkish statement from the Federal Open Market Committee meeting on December 18.
There is an 89% probability that the Federal Open Market Committee will keep its fed funds rate unchanged at 4.25% – 4.50% at its January 29, 2025 policy meeting, and there is an 11% chance of a 25 basis point reduction.
It is likely that the FOMC will keep policies on hold at the March 19, 2025 meeting as well.
Markets are currently pricing in only 35 basis points of cuts for 2025.
The U.S. economy is likely to perform well, which may cause the FOMC to be slower to add accommodation in 2025 than the consensus view.
STOCK INDEX FUTURES
Stock index futures are lower in light of firming U.S. Treasury yields.
Wholesale inventories in November declined 0.2% when a 0.1% increase was expected.
Investors are closely watching the Federal Reserve’s 2025 policy outlook, focusing on the likelihood of fewer interest rate cuts. However, this bearish influence is likely to be offset by prospects of the U.S. economy growing faster than the consensus view.
CURRENCIES
The U.S. dollar Index is lower and remains in a six-day congestion pattern.
The greenback continues to trade close to the two-year high that was touched last week, as traders continue to assess the Federal Reserve’s interest rate strategy following its hawkish projections last week.
The fundamentals and technicals remain supportive to the U.S. dollar, and higher prices are likely.
German business associations believe their current situation is worse than it was a year ago and remain pessimistic about the coming year, according to a survey published by the employer-oriented German Economic Institute IW.
The survey showed 31 out of 49 business associations see the current situation as worse than in 2023, and 20 out of 49 industry representatives anticipate lower production next year, while only 16 expect an increase.
The fundamentals and technicals remain bearish for the euro currency and the British pound, and lower prices are likely.
Tokyo consumer price index inflation grew more than expected in December, keeping alive the probability of a near-term interest rate hike by the Bank of Japan.
The core CPI inflation, which excludes volatile fresh food items, increased 2.4% year-on-year in December. This reading was slightly under expectations of 2.5% and picked up from the 2.2% advance in the prior month.
Japan’s factory output fell for the first time in three months in November. Industrial output declined 2.3% in November from the previous month, according to the Ministry of Economy, Trade and Industry, missing a median market forecast for a 3.4% decline, and compared with a 2.8% increase in October.
Separate data showed Japanese retail sales increased 2.8% in November from a year earlier, beating predictions for growth of 1.5%.
The fundamentals and technicals remain bearish for the Japanese yen, and lower prices are likely.
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