Light Holiday Trading

STOCK INDEX FUTURES

The indexes are little changed as weekly initial jobless claims data showed that jobless claims were 214,000 for the week ending December 20, lower than expectations and last week’s figure of 224,000.

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. Consumer spending rose 3.5%, the most so far this year (vs 2.5% in Q2), led by both goods (3.1% vs 2.2%) and services (3.7% vs 2.6%). Fixed investment continued to rise although at a slower pace (1% vs 4.4%), while exports rebounded sharply (8.8% vs -1.8%). Government spending recovered (2.2% vs -0.1%) and the drag from private inventories was smaller (-0.22% vs -3.44%). Spending on artificial intelligence helped, too, though the pace of growth cooled from Q2. Overall business investment growth slowed to 2.8% in the third quarter from 7.3% in the prior three months.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed around the 97.9 level as jobless claims data did little to move markets. Preliminary data showed a solid US GDP growth in Q3 but failed to alter the rate outlook. 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 the yen, following the Bank of Japan’s rate hike and potential intervention by authorities, 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 weakened to $1.1786 in thin trading due to the holiday-shortened week, staying close to its strongest level since late September as policy outlooks between the European Central Bank and the Fed 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 slipped to $1.35 on Wednesday, although trading was thin ahead of the Christmas holiday. 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 yen strengthened to $156 as traders remained 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. Year-end trading conditions and sharp moves away from fundamentals make the risk of official action particularly elevated. In addition, 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. Markets now await Tokyo’s finalization of the 2026 budget at roughly 122 trillion yen, with cabinet approval possible by Friday.

AUSTRALIAN DOLLAR: The Aussie edged higher ahead of the holiday as minutes from the Reserve Bank of Australia’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 at the front end and lower at the long end as the curve flattened slightly in a what is expected to be a light trading day, with markets closing early. Yesterday’s long-delayed 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 fallen since to 13.3%, down from 24.4% at this time last week.

The spread between the two- and 10-year yields fell to 62.50 bps, while the two-year yield, which reflects short-term interest rate expectations, edged up to 3.532%.

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