Europe stock futures fall as Fed eases pivot talk: markets wrap

The Euro Stoxx 50 contract fell by 0.4%. It came after the MSCI Asia Pacific Index lost as much as 1.1%, the biggest drop since 5 December, led by losses in Hong Kong and Tokyo. US stock futures rose slightly. 

The dollar was broadly steady while yields on two-year Treasuries dropped two basis points, reversing gains made on Friday when New York Fed president John Williams led a chorus of officials in saying it’s too early to begin thinking about lowering borrowing costs.

The pushback may start to scupper the “everything rally” after traders took previous Fed signals as a green light to ratchet up bets on rate cuts next year, helping US and Asian shares to their biggest weekly gains in a month. Swaps traders trimmed bets on cuts in 2024 to just under five from six before the latest Fed rhetoric, according to Bloomberg-compiled data.

Central bankers from the US to Europe and Canada have already begun their battle with traders. Atlanta Fed President Raphael Bostic, who votes on monetary policy next year, told Reuters that he expects two rate cuts in 2024 but not starting until the third quarter. Separately, Chicago Fed president Austan Goolsbee said on Sunday it’s an overstatement to consider rate cuts until officials are convinced inflation is on a path lower to its target. Bank of Canada Governor Tiff Macklem shared a similar sentiment. 

“The US markets are going to need to get evidence that the Fed pushback from NY Fed Williams and Atlanta Fed Bostic is misplaced – with lower core PCE and weaker 3Q GDP revisions key along with modest consumer confidence,” Bob Savage, head of markets strategy and insights at BNY Mellon Capital Markets, wrote in a note. “At the heart of the week ahead is the risk that financial conditions everywhere are easier and sparking more growth and inflation than forecast.”

In Europe, European Central Bank Governing Council Joachim Nagel said Friday it’s too early to be considering rate cuts, while fellow member Madis Muller said that markets are getting ahead of themselves in betting on policy easing in the first half of next year. ECB president Christine Lagarde said the bank had not discussed rate cuts at all.

The final holdout

Attention will soon shift to Japan with the nation’s central bank beginning a two-day policy meeting on Monday. While speculation has grown that the Bank of Japan will soon end the world’s last negative-rate regime, economists see April as the most likely timing for a change, with around 15% expecting Ueda to pull the plug on negative rates in January, according to a Bloomberg survey of more than 50 economists. 

“The BOJ has little need to rush into making policy changes,” Société Générale economists led by Wei Yao wrote in a note. “But markets will be watching for any sign the board is willing to end negative rates or yield curve control.”

Read More: BOJ Is Said to See Little Need to End Minus Rate Next Week 

Elsewhere this week, the Reserve Bank of Australia will release its minutes from the December policy meeting while Bank Indonesia will make its final policy decision of the year. Traders will also be keeping a close eye on developments in the Middle East as Israel pushes back against calls for a ceasefire in Gaza.

Chile rejected the second proposal for a new constitution in as many years at the weekend, highlighting the failure of the nation’s political system to channel social demands into a new set of basic laws. The result, broadly in line with recent polls, means that the current charter dating from the Augusto Pinochet dictatorship will remain in place.

In commodities, gold edged higher while oil rose, extending last week’s rise as major shipping lines suspended transit through the Red Sea, following escalating attacks on merchant ships. 

“This could have major implications for the durability of goods disinflation that we have recently witnessed, which in turn has implications for aggressive forecasts of interest rate cuts,” Benjamin Picton, senior macro strategist at Rabobank, wrote in a client note. “Again, this perhaps highlights the inefficiencies of markets that are quick to price in shifts in the central bank reaction function, but slow to recognise structure shifts in the real economy.”