Stocks steady as traders focus on Fed’s decision; pound slips

BLOOMBERG

Stocks posted small moves in cautious trading as investors looked ahead to the Federal Reserve’s interest-rate decision, bracing for any warnings from Chair Jerome Powell that market expectations of policy easing are overdone. Europe’s Stoxx 600 index edged higher, with Inditex SA climbing after the Zara owner forecast a stronger gross margin. Entain Plc rallied 7.5% following news that the gambling giant’s chief executive officer is standing down. Contracts for the S&P 500 and the Nasdaq 100 pointed to modest gains on Wall Street.
The pound fell and UK bonds rose as data showed the economy shrank more than expected in October, figures that prompted traders to ramp up bets on Bank of England interest-rate cuts next year. The dollar and Treasuries edged higher.
Globally, the focus is on the conclusion of the Fed’s final policy meeting of 2023. While the central bank is widely expected to hold for a third time, the latest US inflation data raised doubts about the likelihood of an aggressive pivot towards policy easing. “The market doesn’t agree with the Fed about inflation, so I expect some push back from Powell, but no game changer really,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris.
“The train has been in motion for a month and a half and one better not stand in front of it,” he said, referring to the rally in markets on hopes of easing.
Markets have slightly trimmed bets on Fed rate cuts, with the first one still projected to occur in May. That revision in expectations shows that investors have in part understood the challenges facing the Fed, according to Franck Dixmier, global chief investment officer fixed income at Allianz Global Investors.
“As markets recalibrate expectations, the US yield curve should adjust to higher levels after a rally that seemed excessive to us,” he said in a note. In Asia, Chinese stocks led selloffs in the region after a top leadership meeting disappointed investors with a lack of strong economic support measures. The losses came after China’s annual economic work conference this week prioritised industrial policy and indicated little desire for large-scale stimulus.
Signals From Powell
Following the last Fed decision, Powell reminded investors that inflation progress will “come in lumps and be bumpy.” The fact that the consumer price index was roughly in line with estimates — and ticked up a bit — underscored the choppy nature of getting prices back to the 2% target — especially in the service sector, which the Fed has zoned in on as the last mile in its inflation fight.
“From a Fed policy perspective, the bar to hike or cut, both are high,” Neeraj Seth, head of Asian credit and a portfolio manager at BlackRock Inc, said on Bloomberg Radio. “The Fed will remain data dependent and at this point the data warrants a pause, a continued pause, but I don’t think we are at a point where the Fed will start signaling any form or shape of cuts coming soon.”
With the Fed widely expected to keep its target rate range steady for the third straight meeting at 5.25% to 5.5%, traders will carefully scrutinise any signals from Powell on the path for policy and the update to the central bank’s quarterly forecasts. How the Fed frames its outlook for rate policy ending next year and 2025 via its “dot plot” could inject some uncertainty into a market that has run ahead of the central bank’s current forecast. Gold was little changed as investors awaited the Fed’s rate decision.