Investor jitters were in play ahead of the highly-anticipated FOMC decision, which then delivered what many interpreted to be a more hawkish than expected announcement, sparking huge moves across the financial markets.
Here are the economic updates you need to know and how asset classes reacted.
Headlines:
- U.K. headline CPI up from 2.3% year-on-year to 2.6% in November as expected; core CPI rose from 3.3% year-on-year to 3.5% (3.6% forecast)
- U.K. PPI input prices flat in November (0.2% m/m uptick expected, 0.1% previous); PPI output prices rose 0.3% m/m (0.2% expected, -0.1% previous)
- Euro area final core CPI reading unchanged at 2.7% y/y in Nov as expected; final headline CPI downgraded from 2.3% y/y to 2.2% vs. expectations of no change
- ECB official Wunsch said that impact of potential tariffs depends on exchange rate, with larger EUR depreciation limiting the negative effect
- ECB official Lane reiterated importance of going on a meeting-by-meeting approach to rate changes, disinflation well on track
- U.S. building permits rose from 1.42M to 1.51M in Nov (1.43M expected); housing starts fell from 1.31M to 1.29M (1.35M forecast)
- U.S. EIA crude oil inventories fell 0.9M barrels (-1.6M expected, -1.4M previous)
- FOMC cut rates by 0.25% from <4.75% to <4.50% as expected, added wording on “timing and extent” of future policy moves
- Fed dot plot projections of interest rates suggested one less cut in 2025 than previously indicated
- New Zealand GDP showed 1.0% q/q contraction in Q3 2024 (-0.2% expected, previous reading downgraded from -0.2% to -1.1%)
Broad Market Price Action:
Dollar Index, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TradingView
Most asset classes started off in tight consolidation as traders bit their nails ahead of the Fed decision, with the exception of bitcoin which cruised lower from the get-go. Asian equities were mixed, as investors also awaited China’s policy updates, as well as the Bank of Japan’s statement later in the week.
Meanwhile, Treasury yields settled a few basis points lower while traders lightened positions but soon surged higher, with the 10-year yield jumping 11 basis points to 4.49%, after the U.S. central bank sounded more optimistic than expected.
In turn, the sharp move higher in yields likely contributed to significant pressure on equity markets, with the S&P 500 suffering its worst decline of the year at a 2.4% slump while the Russell 2000 saw an even steeper 5% tumble.
Gold also underwent substantial downside pressure from a stronger dollar while crude oil managed to stabilize around $70.10, capping off back-to-back declines, after finding some support from API’s reported inventory decline of 4.7 million barrels but soon retreated after the EIA showed a smaller reduction of 0.9 million barrels.
FX Market Behavior: U.S. Dollar vs. Majors:
Overlay of USD vs. Major Currencies Chart by TradingView
The U.S. dollar cruised mostly sideways with a slight bullish tilt against the Aussie and Kiwi early in the day, while traders looked ahead to the FOMC announcement in the upcoming U.S. session.
Additional upside pressure came in play around the London session, with European currencies and the yen also edging gradually lower versus the U.S. currency. The actual announcement sparked a sharp rally, as the Fed added language on the “timing and extent” of future rate changes, as well as the dot plot projections suggesting fewer than expected easing moves for the next couple of years.
In addition, FOMC member Hammack’s dissenting vote may have also contributed to gains for the dollar, along with Fed head Powell’s comments during the presser about September inflation forecasts having “fallen apart.”
Some also say that Trump’s remarks during an interview insisting that he would oppose a bill preventing a government shutdown also boosted the U.S. currency later in the session, as this sparked views that he would prioritize stock market gains over avoiding federal deficits.
By the end of the day, the U.S. dollar logged its largest lead versus NZD (2.40%) followed by AUD (+1.89%) while USD/JPY (+0.83%) and USD/CHF (+0.95%) were behind the pack.
Upcoming Potential Catalysts on the Economic Calendar:
- BOJ Policy Statement and Press Conference during Asian session
- Swiss Trade Balance at 7:00 GMT
- German GfK Consumer Climate at 7:00 GMT
- Euro Area Current Account at 9:00 GMT
- BOE Monetary Policy Decision and MPC Minutes at 12:00 GMT
- US Final GDP q/q & Unemployment Claims at 13:30 GMT
- US Existing Home Sales at 15:00 GMT
- NZD Trade Balance at 21:45 GMT
- Japan National Core CPI y/y at 23:30 GMT
A couple more major central banks (BOJ and BOE) are lined up to announce monetary policy decisions within the day, likely spurring price swings for JPY and GBP pairs during the actual statements.
While both are expected to keep interest rates on hold for the time being, the tone of their press conference and meeting minutes could set expectations for future policy moves next year, so keep your eyes and ears peeled for major changes!