Week in Review: Hawkish Fed Sends Markets into a Frenzy
Last week, the Federal Reserve’s policy change and economic projections caused a stir in the markets, leading to a rise in US yields. Market participants are now factoring in around 40 bps of cuts through December 2025 as US Yields also saw an increase. This shift had a widespread impact across markets, with US equities experiencing their worst day since August. The VIX (volatility index) also saw its second largest daily jump in history as markets tried to digest the Fed’s outlook.
Bank of Japan Holds Rates Steady Despite Expectations
In Asia, the Bank of Japan (BoJ) decided to keep rates steady, defying expectations of a rate cut. Despite improving data in Japan, the BoJ has not been convinced to make a rate cut yet. The Central Bank hinted at a possible rate hike in early 2025, especially as the Japanese Yen continues to weaken.
US Government Shutdown Risk Looms Large
The risk of a US government shutdown increased last week after President-elect Donald Trump urged Republican lawmakers not to support a temporary funding bill. With no backup plan in place, the government faces the possibility of another shutdown. While it may not have as severe an impact on the economy as the 2018 shutdown, it poses challenges for public workers, especially during the holiday season.
The Week Ahead: Thin Liquidity Expected with Key Data Releases
As we head into the upcoming week, markets are expected to see thin liquidity and range-bound trade due to the Christmas holiday and a bank holiday in the UK and other countries. In the Asia Pacific region, Japan will release Tokyo inflation data on December 26th, providing insights into potential rate hikes in early 2025. In developed markets, the focus will be on UK GDP Q3 data and the Turkish Central Bank’s rate cut meeting. With the potential for a rate cut in Turkey, markets will closely monitor the bank’s decision based on inflation levels before making any changes.