A look at the day ahead in the US and global markets by Samuel Indyk
The great year for the US stock markets took a breather on Thursday, perhaps expected after a rally that led the Nasdaq to 20,000 points for the first time this week and the S&P 500 to another new record.
Gains have been driven by optimism about artificial intelligence and interest rate cut expectations, with attention now turning to the Federal Reserve’s final policy meeting of the year, starting next Tuesday.
The central bank is likely to follow November’s 25 basis point rate cut with another cut of the same size, bringing the fed funds rate to 4.25%-4.5%.
But where the Fed plans to raise rates in 2025, the market will be more interested.
Donald Trump’s election victory last month has left investors with many questions about the economy in 2025.
Will Trump continue with blanket tariffs on US imports? Will these rates be inflationary? And how will the Fed respond?
For now, markets are pricing in just two more quarter-point cuts in 2025, assuming the Fed cuts rates on Wednesday.
Should the Fed cut rates next week, that would mean a total of 100 basis points of easing this year – the same amount the European Central Bank (ECB) delivered in 2024 after cutting borrowing costs for the fourth time on Thursday.
But while ECB President Christine Lagarde left the door open for more rate cuts next year, the ECB president refused to commit to a specific rate path, leaving some investors scratching their heads.
Markets were betting that the eurozone central bank would cut rates at every meeting in the first half of next year, possibly even faster, while inflation would return close to target and growth would remain sluggish.
Those expectations were little changed after Thursday’s decision, which saw deposit rates fall to around 1.75% by the end of next year.
The ECB was not the only show in town this week: the Swiss and Canadian central banks each opted for massive interest rate cuts of 50 basis points.
Next week, in addition to the Fed, the central banks of Sweden, Norway, Great Britain and Japan will also announce their policy decisions.
The global interest rate picture puts the dollar index on track for a 1% rise this week, the biggest weekly gain in a month and the ninth positive week in 11 weeks. The US currency has risen against all major peers this year.
The S&P 500 is within touching distance of recent peaks and on track for an annual gain of more than 20% for the second year in a row, with futures pointing to a firmer open on Friday, led again by the tech-heavy Nasdaq.
