SIFs Muted in Light Trade

STOCK INDEX FUTURES

The indexes are little changed and expected to remain in a thin range during the holidays, which should bring lighter trade volumes. There is also no new data out of the US today and a light calendar for next week as well. The S&P 500 and the Dow are tracking near record highs amid expectations that sustained economic growth and more-accommodative monetary policy will support earnings prospects. Investor confidence that corporate revenues will remain strong persists, but doubts about the scale of next year’s Fed rate cuts and persistent worries that AI‑related capital spending is overstated kept a stronger Santa Claus rally from taking hold as the year-end approached. Commodity names drew attention as both precious and base metals extended their climbs, lifting stock prices for Newmont and Freeport‑McMoRan. Oil producers also looked set for gains after the White House sharpened its stance toward the Venezuelan government and its energy sector. Meanwhile, Nvidia edged higher following a new licensing agreement with AI startup Groq.

Data out Tuesday showed that GDP grew at an annualized rate of 4.3% in the third quarter, the most in two years compared to 3.8% in Q2, and forecasts of 3.3%. The growth mainly reflected increases in consumer spending, exports, and government spending.

CURRENCY FUTURES

US DOLLAR: The USD index is lower, hovering near recent lows from early October. Markets are pricing in two rate cuts in 2026 amid easing inflation, a moderating labor market, and President Trump’s push for looser policy, even as Fed officials remain divided. Additionally, safe-haven flows into precious metals, rising geopolitical tensions, and gains in other currencies, have further pressured the greenback, reinforcing expectations of policy divergence and typical year-end weakness. The dollar is also on track for its worst annual performance in more than two decades, after a turbulent year marked by tariffs and concerns over the Fed’s independence.

EURO: The euro traded just under $1.18 in a holiday-shortened week, staying close to its strongest level since late September as policy outlooks between the ECB and the Federal Reserve continued to diverge. Last week, the ECB left interest rates unchanged for a fourth straight meeting and signaled that rates are likely to remain at current levels for some time. Recent economic data have also surprised to the upside, prompting the ECB to upgrade its growth outlook again following a similar move in September. The central bank now forecasts eurozone growth at 1.4% in 2025, up from a prior estimate of 1.2%, while headline inflation is expected to hover around the 2% target through 2028. In contrast, softer-than-expected US inflation readings have fueled speculation that the Fed may continue cutting rates next year, lending further support to the currency.

BRITISH POUND: The pound traded lower to around $1.3515, although maintained support from a weaker US dollar as markets anticipate at least two Fed rate cuts next year, reducing the dollar’s yield advantage. The Bank of England cut rates by 25 bps to 3.75% last week in a narrow 5-4 vote reflecting ongoing inflation concerns. Although inflation eased to 3.2% in November, it remains well above the Bank’s 2% target. Governor Andrew Bailey said rates are likely to trend lower, but not as quickly as markets might hope. UK GDP grew 0.1% in the third quarter, in line with expectations, though the BoE forecasts flat growth in the final quarter. Even so, traders expect at least one further rate cut in the first half of next year. Sterling has gained over 2% this month and roughly 8% year-to-date, positioning it for its strongest annual performance against the dollar since 2017.

JAPANESE YEN: The Japanese yen weakened past the 156 level, although is set for weekly gains despite cooler-than-expected inflation data. The Tokyo CPI inflation rate eased to a more than one-year low of 2% in December, reflecting softer food and energy price pressures. Meanwhile, core prices rose 2.3% on the year, below last month’s reading of 2.8% and forecasts for a 2.5% rise. Tokyo’s inflation data are widely regarded as a leading indicator of nationwide price trends and are therefore closely monitored by policymakers and markets. Japan’s budget for FY 2026 was passes earlier on Friday, aimed at balancing fiscal support with long-term debt management. Markets also reacted to plans that Tokyo may reduce issuance of super-long bonds next year, pulling benchmark government bond yields back from a 26-year top. Markets continue to remain focused on potential intervention from authorities. Finance Minister Katayama’s recent comments highlighted Tokyo’s readiness to act against excessive yen movements, saying on Tuesday that Japan has a free hand in dealing with excessive moves in the yen. October Bank of Japan meeting minutes suggested policymakers are debating whether rates should continue rising toward neutral levels, with higher rates seen as a tool to support long-term economic and price stability. Last Friday, the BOJ delivered a widely anticipated rate hike, but Governor Ueda’s remarks were viewed as less hawkish than some had hoped, leaving yen under pressure in the aftermath.

AUSTRALIAN DOLLAR: The Aussie climbed to around $0.6714, hitting its highest level since October of last year as growing expectations of higher interest rates from the Reserve Bank of Australia lent support to the currency. Minutes from the RBA’s last policy meeting showed board members considered whether a rate rise next year would be needed to tame inflation. There was growing uncertainty about whether financial conditions were restrictive or not, putting the spotlight on the fourth-quarter CPI report due in late January. A strong Q4 core inflation print could prompt a rate hike at the RBA’s February meeting. Markers are currently pricing in about a 28% chance of a 25 bp rate increase. By February, the RBA will likely have enough information to make a judgment on the persistence of inflationary pressures. The Aussie was further supported by surging commodity prices, with gold and copper hitting new highs, reflecting Australia’s strong export profile.

INTEREST RATE MARKET FUTURES

Yields edged higher across the curve in a what is expected to be a light trading day. Tuesday’s third-quarter GDP data revealed robust economic growth, largely to strong spending by consumers. The strong reading counters worries that tighter financial conditions had slowed the labor market, supporting arguments from Fed officials advocating a more hawkish stance. Policymakers’ median projection still points to one rate reduction in 2026. Further data on Tuesday showed consumer confidence in December fell below expectations to its lowest level since April. Market bets that the Fed will cut its key interest rate at its January meeting have slipped to under 20%.

The spread between the two- and 10-year yields is 63.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.473%.

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