Fed Meeting in Focus this Week

STOCK INDEX FUTURES

The indexes are higher with the S&P and Nasdaq trading higher, while the Dow lagged. Focus this week will center around Wednesday’s highly anticipated Fed meeting, where markets have priced in just under a 90% chance that the Fed will lower rates by 25 bps. The expectations have emerged despite a divide among policymakers over whether to focus on the labor market or inflation, which some at the Fed worry could still be too high. Recent comments from several influential officials for the third cut of this year have cemented bets, though the prospects for 2026 are seen as less certain.

On the corporate front, Friday brought news that Netflix would be purchasing Warner Bros. for $72 billion, a move that caught Wall Street off guard and also caught the eye of President Trump. Trump has raised potential antitrust concerns about the deal, noting that the market share of the combined enterprise could pose some problems. The company faces a lengthy Justice Department review of a deal that would reshape the entertainment industry.

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 is little changed to start the week as markets await the Fed’s interest rate decision on Thursday, where it is widely expected that the central bank will lower rates. Fed Funds futures are implying an 89.6% chance of a rate cut. However, 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 edged higher following a rise in euro bond yields and industrial production data from Germany, which showed that output rose in October. German 30-year yields hit their highest since 2011 in early trading. Output in Germany grew 1.8% on the month, a strong growth over September’s 1.1%, with the reading benefitting from strong growth in the construction sector, where growth was up 3.3%. On the data calendar, it is a relatively light week for the eurozone with Italian industrial production figures 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 slipped against the dollar but held steady around the $1.33 range as markets await the Fed’s decision later this week as well 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. 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 RICS house price survey, industrial production, and trade figures.

JAPANESE YEN: The yen fell against the dollar following downwardly revised Q3 GDP data. 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 led markets drive rate hike expectations as BoJ Governor Ueda has said that the negotiations will be instrumental in deciding on the timing of a rate hike. Governor Ueda will be offering remarks at a Financial Times event on Tuesday that will catch more attention than usual as markets look for further clues on the BoJ’s policy outcome. Elsewhere 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 slipped against the dollar ahead of the Reserve Bank of Australia’s policy meeting this week, where markets are expecting the central bank to keep rates on hold. Focus will also center on the wording of the statement from the policy setting board with recent figures showing signs of inflationary pressures in the economy. Household spending, monthly inflation, and private demand figures have all posted strong readings recently and are likely to stay elevated. The figures have also strengthened the case that the next interest rate move from the RBA could very well be a rate hike. Elsewhere on the calendar, the National Australia Bank’s business survey for November will also be released on Tuesday and will garner some attention over data on capacity utilization. The RBA has warned that capacity constraints would be a large factor on the outlook for inflation interest rates. 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 first half of 2026.

INTEREST RATE MARKET FUTURES

Yields are higher at the front end and flat at the long end of the curve as markets prepare for the Fed’s policy decision and interest rate outlooks on Wednesday. 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 will 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 is likely to be several officials who do not see any easing in 2026. On the supply front, the Treasury will auction $58 billion in three-year notes on Monday, $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 is 56.80 bps, while the two-year yield, which reflects short-term interest rate expectations, rose to 3.579%.

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