Fed Hawkish, US-China Talks Do Not Excite

STOCK INDEX FUTURES

The indexes moved lower following the outcome of US-China trade talks, which did little to excite markets, while a hawkish tone out of the Fed led to a wave of selling. The US will lower the overall tariffs on Chinese imports from 57% to 47%, while China pledged to work to end the flow of fentanyl ingredients into the US and increase purchases of US soybeans. The Fed cut rates by 25 bps, but Fed Chair Powell offered a hawkish tone in his post-meeting presser, reminding markets that the Fed is not on autopilot and that a rate cut in December was “not a foregone conclusion.”

On the earnings front, Google/Alphabet, Microsoft, and Meta reported mixed results, with Google’s results strong enough to lift Nasdaq futures after the bell. Strong AI demand powered Google’s result, while both the core advertising and cloud computing businesses beat revenue expectations. Google also raised its projected capital expenditures for the year to between $91 billion and $93 billion, which could assuage fears of an AI bubble. Regarding speculation of an AI bubble, Fed Chair Powell noted that comparisons to the dot-com bubble are different, as companies now actually have earnings, whereas dot-com companies’ valuations were based on ideas. Elsewhere, Meta recorded a nearly $16 billion one-time charge in the third quarter as a result of the Big Beautiful Bill and said its capital expenditures next year would be larger than in 2025. Shares of the company fell around 10% before the bell as a report said the company is seeking a $25 billion bond sale. Microsoft shares also fell as a higher-than-expected capital expenditure number spooked investors. Apple and Amazon are set to report quarterly results today.

Amazon and UPS announced large layoffs; UPS slashed 48,000 jobs, and Amazon announced 30,000 white-collar layoffs. These are the largest layoffs since 2022 and are aimed at correcting pandemic-era hiring, as AI is expected to reduce the need for certain corporate positions.

CURRENCY FUTURES

US DOLLAR: The USD index continued its advance after surging higher following the Fed’s rate cut. While a 25 bps was delivered as expected, dollar strength came after Fed Chair Powell struck a hawkish tone and said that a December rate cut was not a foregone conclusion, leading to a sell-off in the Treasurys and equities markets as market-implied odds of a rate cut fell. Market odds of the Fed delivering another quarter-point cut in December have eased to around 68%, after having been nearly fully priced before Wednesday’s decision. Powell also noted that a policy divide within the central bank and a lack of data due to the shutdown will make it difficult for the Fed to cut rates again. Meanwhile, currency markets were largely muted following the highly anticipated Trump-Xi meeting, where the leaders signed a trade and tariff truce. Tariffs on China will be cut by 10%, and China will resume purchasing US soybeans, among some of the details. The lack of reaction in the currency market suggests that while the deal is a positive, investors remain cautious on the long-term prospects of US-China trade relations.

EURO: The euro fell on the heels of a slate of data releases as the European Central Bank kept rates steady in a widely expected move. On the data front, the eurozone economy picked up speed, growing more than expected in the three months to September. GDP grew 0.2%, beating out forecasts of a 0.1% rise; on an annualized basis, GDP clocked in at 1.3%, higher than forecasts of a 1.2% growth. Among the bloc’s largest economies, France grew 0.5%, exceeding expectations of 0.2%, driven by a sharp rise in exports, while Spain’s GDP rose 0.6% as expected, supported by strong household consumption and fixed investment. German economic activity held flat due to a decline in exports while Italy stalled as well. Germany’s economy is shouldering a large portion of newly imposed US tariffs, since it relies more on exports and manufacturing than its European peers. However, hopes of a revival in the German economy are rising on expectations of increased arms manufacturing and increased spending on infrastructure. On the inflation front, German CPI data pointed to a modest easing in price pressures, although some areas experienced an acceleration in prices. Meanwhile, Spanish inflation figures came in hotter than expected. On the employment front, eurozone unemployment held steady at 6.3% in September, unchanged from August, as Germany’s unemployment rate held steady at 6.3%. Elsewhere, euro area consumer confidence improved slightly, driven by positive consumer expectations about households’ future finances and general economic conditions.

BRITISH POUND: The pound fell against the dollar in overnight trade after falling sharply against the dollar on Wednesday following hawkish comments from Fed Chair Powell in his post-rate-cut presser. The pound was also under pressure as Prime Minister Keir Starmer declined to renew his no-tax-hike pledge, citing worsening economic forecasts. There is nothing on the UK economic calendar today, with the next piece of data being the Nationwide House price index out early Friday morning. The Office for Budget Responsibility plans to downgrade the UK’s productivity growth forecast by about 0.3%, which would amount to a £20 billion gap in public finances and add pressure on Finance Minister Rachel Reeves to address the shortfall. CPI inflation data for September fell short of expectations, with inflation holding at 3.8%, showing no changes from the previous month after rising 0.3% in August. Inflation is expected to continue to moderate, offering the BoE a potential reprieve if those expectations are reflected in upcoming data. Money markets are now pricing in a 68% chance of a rate cut by year-end, up from 50% before last week’s inflation data was released. The BoE is likely to be highly divided when it votes on interest rate moves in November.

JAPANESE YEN: The yen fell sharply lower after the Bank of Japan maintained interest rates at 0.5% as expected, although repeated the bank its intention to continue to increase rates in the future. Markets took the BoJ’s tone as cautious, with only two policymakers calling for a rate hike, the same as in September, highlighting what could be a very gradual approach to raising rates. BoJ Governor Kazuo Ueda also offered little detail on when the central bank could next raise rates in his post-meeting press conference. Ueda said he wanted to see more information regarding next year’s shunto wage negotiations and examine risks stemming from overseas economies. The bank also left its economic and price projections nearly unchanged, which signals that the bank is in no rush to raise rates anytime soon, and with only one meeting left before year-end, it appears uncertain that any policy tightening will happen before 2026. That being said, there is quite some time for economic developments to shape the BoJ into a place where it can raise rates. Japan’s new economic revitalization minister, Minoru Kiuchi, said on Tuesday that the new administration’s priority would be to accelerate economic growth. The remark highlights the market’s focus on the new administration’s plans on reflating the economy through expansionary fiscal policy, which puts it at odds with the BoJ, as Prime Minister Takaichi has shown support for accommodative monetary policy. On the data front, Tokyo consumer price data for October, out later this evening, offers a leading indicator of country-wide trends, which comes out alongside national industrial production and retail sales figures for September.

AUSTRALIAN DOLLAR: The Aussie fell against the dollar as markets weighed the outcome of the Trump-Xi meeting and as the US dollar broadly strengthened against most major currencies. The US and China agreed to extend their temporary trade truce for another year, continuing the framework set during last week’s meeting of top officials in Malaysia. On the home front, CPI data surprised to the upside. Consumer prices rose 1.3% in the third quarter, above expectations of a 1.1% increase. Annual CPI inflation rose to 3.2%, up from 2.1%. The Trimmed Mean CPI, a key measure of inflation, rose 1.0% in the third quarter, above expectations of a 0.8% rise. The figures now put inflation above the Reserve Bank of Australia’s target band and have nullified any hopes that the central bank will cut interest rates in November and dim prospects for future policy loosening in the near term. Governor Michelle Bullock recently downplayed the spike in unemployment that saw bets for a November rate cut rise, reiterating the board’s cautious approach to policy, signaling that the central bank will likely need to see a convincing downtick in inflation as a precursor to cut rates again.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve, continuing a sell-off from yesterday following the Fed’s decision to lower interest rates by 25 bps, while Fed Chair Powell was quite hawkish in his post-meeting presser. Powell said there were strongly differing views regarding how to proceed in December, and that a rate cut in December was “not a foregone conclusion – far from it. Policy is not on a preset course.” Regarding quantitative tightening, the Fed announced the end date would be December 1, farther than market expectations of an October 31 end, which added to the selling pressure. The Fed said it will be rolling over the entirety of maturing Treasury securities and reinvesting its MBS assets into Treasury bills, aiming to temper recent stress in overnight funding markets. Powell also reiterated a no-risk-free path for policy tone, underscoring uncertainty and data dependence, which, as a result of the shutdown, will make it more difficult for the Fed to cut rates in December. Powell noted that economic activity continues to expand at a moderate pace and that business investment is expanding despite tighter financial conditions – positives, which could encourage the Fed to keep rates on hold in December. Regarding inflation, Powell said that the Fed’s base case is that tariffs’ effects on inflation will be short-lived. Wednesday’s decision drew dissents from Fed Governor Stephen Miran, who again called for a deeper reduction in borrowing costs, and from Kansas City Fed President Jeffrey Schmid, who favored no cut at all given ongoing inflation.

The spread between the two- and 10-year yields fell to 48.30 bps from 48.90 bps on Wednesday, while the 2-year yield, which reflects interest rate expectations, moved higher to 3.618%.

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