Markets cautious as FOMC members seek to quell easing expectations

• Indecisive trade in Europe as Fed members continue to ease expectations
• JPY slumps as BoJ take cautious approach
• Energy markets ease back as US announce Red sea coalition

Another indecisive start in Europe has the DAX and FTSE 100 in the green, as the Ibex and CAC head lower. Markets continue to weigh up the possibility that last week’s FOMC-led surge may have been built on false hopes of a bumper year of easing ahead, with San Francisco Fed President Mary Daly noting her view that we will see three rate cuts next year. This is a far cry from the six rate cuts currently priced by the market. Meanwhile, the Chicago Fed President Austan Goolsbee has warned that markets may have misinterpreted Jay Powell’s message, instead hearing what they wanted to hear. For now, markets remain steadfast in their approach, holding on to gains ahead of the key festive period. However, there is a feeling that we are pricing in a best-case scenario for 2024, and thus the risk appears firmly skewed towards potential disappointment. Whilst somewhat perverse, the best hope for equity market bulls would be a weaker economic picture, forcing the banks to put their foot on the gas.

The yen has been hit hard in early trade today, with the Bank of Japan continuing to take on a somewhat hesitant approach once again. While JPY had come into favour off the back of recent hawkish BoJ comments, today’s meeting saw a desire to await further clues on whether wage growth will prove strong enough to maintain inflation at 2% going forward. Understandably, for a nation that has been stuck in a low inflation/low wage environment for so long, Ueda will see this recent inflation surge as an opportunity to permanently put the country on a new course. With that in mind, traders hoping for any decisive action from the BoJ to drive down inflation may be waiting a long time, with any tightening likely to be minimal in nature.

Energy markets continue to provide a key focus for markets, with recent gains helping to rekindle questions over a potential impending inflationary resurgence. Yesterday’s announcement that the US has put together a 10-nation coalition aimed at providing security in the Red sea has helped drive down crude and natural gas prices today, but there will understandably be a degree of caution as we wait to see whether they can halt the attacks.