A look at the day ahead in U.S. and global markets from Mike

Dolan

Although the Federal Reserve's "hawkish cut" on Thursday had

been broadly expected, markets now fear 4% policy rates will be

the floor for the coming year at least - and no further easing

until midyear or later.

The picture painted by the Fed removes monetary easing as

tailwind from the stock market for months and has seen the

dollar rocket to its highest in more than two years -

bowling over emerging, developed and crypto currencies

alike.

Lifting their median inflation forecast for next year by 0.3

percentage point to 2.5% but only nudging the GDP growth up a

tenth to 2.1%, Fed policymakers also raised their policy rate

forecasts for the next two years by half a point to 3.9% and

3.4% respectively.

And they lifted the longer-term horizon too, with

projections for the long-term neutral rate nudged up to 3% for

the first time since 2018.

"It's a new phase and we're going to be cautious about

further cuts," Chair Jerome Powell said after the Fed announced

the widely expected quarter-point cut into a 4.25-4.50% range.

Markets took the cue and futures now don't fully price

another quarter-point reduction until June at the earliest - and

doubt there'll be any more over the rest of the year.

Already aggravated Treasuries got whacked again, with

10-year and 30-year yields vaulting 4.5%

and 4.7% respectively to hit their highest since May. The 2-10

year yield curve steepened to its highest in three months.

Compounding the angst, debt ceiling worries crept back onto

the radar. President-elect Donald Trump on Wednesday disrupted

bipartisan efforts to avert a government shutdown as he

pressured his Republicans in Congress to reject a stopgap bill

to keep the government funded past the end of the week.

The cocktail of events left no Christmas cheer for an

historically expensive stock market that's already seen momentum

slowing and is increasingly fearful of investors'

almost-unchallenged bullishness for 2025. Some now suggest most

of the positive post-election fiscal and economic scenario as

well as the U.S. 'exceptionalism' theme is already in the price.

The benchmark S&P500 and blue-chip Dow Jones

indexes saw their biggest one-day percentage decline since early

August and the Nasdaq clocked its biggest drop since July. The

small cap Russell 2000 dropped 4.4%, its biggest drop

since June 2022.

Even though it's still up 12% for 2024 to date, the Dow

suffered its 10th straight session of declines - the longest

streak of daily losses since 1974.

And adding to the wobble in tech, shares in Idaho-based

Micron Technology ( MU ) plunged 15% after the bell after it

missed quarterly revenue and profit estimates as weak demand for

consumer products such as personal computers and smartphones hit

the chipmaker's business.

Casting a pall over the yearend, the VIX volatility gauge

jumped 11.75 points to close at a four-month high of

27.62 - although it subsided again closer to 20 overnight.

Stock futures are also attempting to claw back some

of the losses on Thursday.

But the Fed was just the headline central bank in a stream

of other yearend policy decisions around the world.

Japan's yen skidded to its weakest since July against

the pumped-up dollar after the Bank of Japan kept its rates

unchanged and offered few clues on how soon it could push up

borrowing costs.

Sterling was an exceptional gainer against both the dollar

and euro, with the Bank of England expected to hold the line on

its borrowing rates later on Thursday and likely steer as

hawkish as the Fed.

Above-forecast wage and inflation data this week cemented

the hawkish UK picture even amid signs of an alarming

manufacturing slump - with 10-year UK government borrowing

premiums over Germany ballooning to its widest since 1990.

Elsewhere, a hawkish Norwegian central bank also held policy

rates steady. Sweden's Riksbanks cut as expected, but also

guided on a more cautious approach next year.

In Brazil, there was growing concern about the fiscal and

monetary mix there as Brazil's real tumbled by the most

in over two years to a fresh record low on Wednesday and stocks

and bonds were pressured as financial markets put the Brazilian

government's spending plans and widening deficit to the test.

The alarming sight of the currency falling after such steep

central bank interest rate rises this week and with bond yields

climbing is seen by many as a red flag.

Back stateside, post-election winner Bitcoin was

knocked back briefly below $100,000 as the dollar revved up

post-Fed - but reclaimed the round figure on Thursday.

Key developments that should provide more direction to U.S.

markets later on Thursday:

* Bank of England policy decision and statement; Brazil Central

Bank releases Inflation Report, Central Bank of Mexico releases

inflation report

* US Q3 GDP revision, Q3 corporate profits, weekly jobless

claims, Philadelphia Federal Reserve's December business survey,

November existing home sales, Kansas City Fed manufacturing

survey, October TIC data on overseas Treasury holdings

* US Treasury sells 5-year inflation-protected securities

* U.S. corporate earnings: FedEx, Nike, Conagra Brands, Lamb

Weston, Darden Restaurants, Accenture, Carmax, Factset, Paychex,

Cintas

* European Union summit in Brussels

(By Mike Dolan,

[email protected])