SIFs Muted Ahead of Policy Decision

STOCK INDEX FUTURES

The indexes inched lower in muted trade, extending losses from Monday as markets await the Fed’s policy decision tomorrow. Nvidia shares jumped following news that the company secured approval to resume advanced chip sales to China, with 25% of sales revenue paid to the US government. However, China is likely to restrict domestic purchases of the chips. Both Wall Street and the Fed get a last look at the labor market before Wednesday’s rate decision, with the release of delayed JOLTS readings on job openings, quit rates, and layoffs for October due later in the morning.

The Supreme Court’s ruling on tariffs is expected to come soon, and President Trump is appearing to signal that he expects the court to rule against his tariffs. In a social media post on Sunday, Trump argued that his method of instituting tariffs is far less cumbersome than other methods, suggesting that if the court knocks down his tariffs, there are still feasible ways to implement them.

CURRENCY FUTURES

US DOLLAR: The USD index held steady as markets await the Fed’s interest rate decision on Wednesday, where it is widely expected that the central bank will lower rates. Fed Funds futures are implying an 89.4% chance of a rate cut. The JOLTS job openings report for October will be out later in the morning but is expected to have little impact on the market, as investors are likely already positioned for the Fed event tomorrow. The FOMC appears to remain highly divided on how to move on the economy, creating a situation where future easing out of the central bank is likely to face strong resistance. Market focus will center around the Fed’s newest interest rate projections for clues on how much easing to expect in 2026. The end of Fed Chair Powell’s term in May could also swing sentiment, as markets await an announcement from the White House on who the next Fed chair will be.

EURO: The euro is little changed against the dollar following Monday’s selloff in bund markets, after European Central Bank board member Isabel Schnabel said that the next move out of the central bank may be a rate hike rather than a rate cut, contrary to what most have expected. Regardless, given the current economic landscape of the eurozone, policy moves from the ECB are not expected to happen anytime soon. Germany’s exports rose 0.1% on the month in October, above forecasts of a 0.2% drop, to reach a six-month high and marking the second consecutive monthly gain. Exports were supported by demand from EU trading partners, where exports grew 2.7%. However, exports to the US fell 7.8% following an 11.89% surge the month prior. Looking ahead on the data front, Italian industrial production figures are out on Wednesday, followed by final CPI data for November from Germany, France, and Spain on Friday. The Fed’s interest rate decision on Wednesday, alongside its release of new interest rate projections, will be a big catalyst for the euro. Stronger inflation expectations from Fed members could underscore concerns that the Fed will limit its policy easing in 2026 and see the euro drop against the dollar.

BRITISH POUND: The pound held steady around the $1.332 range as markets await the Fed’s decision tomorrow as well as the Bank of England’s meeting on December 18, where a rate cut is also expected. Recent strength in the pound has been supported by a better-than-expected revision to services PMI data and market relief over Finance Minister Rachel Reeves’ budget, which was better received than feared. Recent support for the pound could falter if Fed Chair Powell delivers hawkish remarks in his post-meeting presser. Markets are pricing roughly an 84% chance that the BoE will lower rates next week, with a second rate cut priced in by June. Subdued wage growth is likely to put a damper on spending and weigh on inflation, as Governor Andrew Bailey has said recently, although markets should continue to monitor upcoming economic data for indicators on inflation direction. Looking ahead, GDP data out Friday for October will be closely watched, with forecasts expecting growth of 0.1%. Also out on Friday will be the RICS house price survey, industrial production, and trade figures.

JAPANESE YEN: The yen continued its fall against the dollar as ongoing fiscal concerns and a powerful earthquake, which struck the northeastern part of the country, pressured the currency ahead of the Fed’s meeting tomorrow. Q3 GDP was revised to a 2.3% annualized contraction, much lower than expectations of a 1.8% drop. However, the contraction in economic growth is likely to be reversed in Q4. For the Bank of Japan, the figures will likely have little impact on their interest rate decision next week, a meeting where markets have increasingly expected them to raise interest rates. Strong prospects for next year’s spring wage talks have been driving rate hike expectations as BoJ Governor Ueda has said that the negotiations will be instrumental in deciding on the timing of a rate hike. On the data front, new figures showed that Japan’s bank lending rose 4.2% in November, up from a 4.1% gain in October and above forecasts of a 4% gain. It also marked the fastest pace of growth since April 2021.

AUSTRALIAN DOLLAR: The Aussie gained firmly against the dollar after the Reserve Bank of Australia kept rates on hold and signaled that the next move out of the central bank will be upwards. The bank said that increased risks to inflation have presented themselves in the economy and that it would need a little longer to assess the persistence of the inflationary pressures. Household spending, monthly inflation, and private demand figures have all posted strong readings recently and are likely to stay elevated. Data from the National Australia Bank earlier in the day showed that capacity utilization across the economy was at its highest level in 18 months, which will add to the RBA’s level of concern about the inflation outlook. Employment data for November on Thursday will cap the week; if inflation falls from the current 4.3%, expect a round of calls for rate hikes in the first half of 2026.

INTEREST RATE MARKET FUTURES

Yields inched lower across the curve, with the 10-year yield at 4.149% as markets prepare for the Fed’s policy decision and interest rate outlook tomorrow. The delayed JOLTS report is due today, while the weekly ADP figures recovered to show a 4,750 gain in net jobs, although they did little to move markets as focus is centered on tomorrow. Markets are seemingly priced in for a rate cut, as a string of private jobs figures have pointed to signs of an ever-weakening labor market, while inflation has remained elevated but not accelerating. Friday’s PCE figures came in line with expectations, showing that prices rose 2.8% on the year in September, easing from 2.9% in August. Also on Friday, the University of Michigan consumer confidence index reflected a rebound in consumer sentiment in their December print, slightly easing concerns that high living costs and slow hiring could hamper spending.  Focus on the Fed meeting will center around the Fed’s new interest rate expectations, as officials at the Fed have seemingly become highly divided on how to move on interest rates. There are likely to be several officials who do not see any easing in 2026. On the supply front, the Treasury will auction $39 billion in 10-year notes on Tuesday and $22 billion in 30-year bonds on Thursday.

The spread between the two- and 10-year yields inched up to 57.40 bps from 56.80 bps on Monday, while the two-year yield, which reflects short-term interest rate expectations, slipped to 3.567%.

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