Fed Decision in Focus Ahead of Trump-Xi Talks

INTEREST RATE MARKET FUTURES

Futures are lower across the curve as markets await the Fed’s policy decision, where the central bank is expected to lower interest rates by 25 bps. Fed commentary on the labor market will be in focus, as the shutdown has prevented the release of official government data while private figures have continued to show weakness. The pace of hiring has fallen dramatically, although an immigration crackdown has limited the supply of workers in the US and helped keep the unemployment rate low. Additionally, companies so far have been reluctant to conduct layoffs, although recent announcements from UPS and Amazon have sparked some worries that more layoffs could be on the horizon for US businesses. At its last meeting, Fed officials felt the job market remained roughly balanced between the demand for and supply of workers, so any commentary that differs from this point of view will be a strong policy signal for December, although the lack of official government data has made this more complicated. September’s inflation report showed that consumer prices rose at a slower-than-expected pace, giving the Fed more room and reason to focus on the labor market, which will ultimately be the deciding factor in policy.

Markets will also watch for signals about when the bank will end its quantitative tightening cycle. Powell recently signaled that the end of QT is approaching. An end to QT would be bullish for Treasurys, as it reduces bond supply and lowers the Treasury’s financing requirements. However, the announcement about ending QT is less important than when QT actually ends and the massive reinvestments begin.

The spread between the two- and 10-year yields rose to 48.90 bps from 48.70 bps on Tuesday, while the 2-year yield, which reflects interest rate expectations, edged higher to 3.498%.

STOCK INDEX FUTURES

The indexes moved higher ahead of the Fed meeting today, and as optimism surrounding a potential US-China trade deal grew following upbeat comments from President Trump. To beat a dead horse, the Fed is widely expected to cut interest rates by 25 bps, while markets will focus on any policy cues regarding the bank’s meeting in December. President Trump said he expects to get a “great deal” done with China during his meeting with President Xi, reflecting market optimism that has been growing since late last week as the deal is expected to significantly lower tariffs on Chinese goods.

Nvidia shares rose around 3% in premarket trading after Trump said he would discuss the company’s Blackwell processors with Xi, putting the chip manufacturer on track to become the first public company valued at $5 trillion. Quarterly results from Microsoft, Alphabet, and Meta on Wednesday will be in focus after the bell as the “Magnificent Seven” companies begin to report earnings as investors continue to gauge whether or not results justify high valuations. Apple and Amazon will report on Thursday.

Stocks continued their advance on Tuesday ahead of the Fed’s meeting. Gains in equities were concentrated in AI and megacap tech after Microsoft reached a landmark deal with OpenAI, while Nvidia surged more than 6% after announcing an investment into Nokia. Earnings results also lifted stocks higher and supported risk appetite, with UPS, UnitedHealth, and several other large companies posting strong results and raising profit outlooks. Elsewhere in the corporate world, 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.

On the data front, US consumer confidence reached a six-month low in October as worries over the labor market were in focus. Lower-income households reported struggling to make ends meet amid higher prices. The Conference Board said references to prices and inflation remained the main topic influencing consumers’ views of the economy this month. Elsewhere, the Dallas Fed’s general business activity index dropped 3.8 points from the previous month to -9.4 in October. The revenue index, a key measure of state service sector conditions, fell by 4 points to -6.4. The deteriorating trend for business drove firms to shed their employment levels for a second month.

CURRENCY FUTURES

US DOLLAR: The USD index moved higher ahead of the Fed’s policy decision later today, boosted by optimism that the US and China will agree on a trade deal following the meeting between President Trump and President Xi on Thursday. President Trump in a speech on Wednesday said he expects to get a “great deal” done with China. Recent dollar strength has been attributed to expected relief from tariffs, particularly in regard to China, as markets expect the president to move to lower levies on China substantially. Elsewhere, markets will look to commentary from the Fed today, as markets expect the Fed to move to cut rates while growing more cautious about the prospects of another rate cut in December. Fed Funds futures are implying an 85% chance of a cut, down from over 98% a week ago.  Cautious commentary coming out of the Fed could provide support for the dollar given that a December cut is almost fully priced in.

EURO: The euro fell against the dollar to snap a five-day streak of gains as dollar strength weighed on the euro ahead of today’s Fed decision and Thursday’s ECB decision. On the data front, Spanish GDP figures disappointed, with GDP rising at 2.8% on an annualized basis, below expectations for a 3.0% rise. Strong household spending and solid employment  were countered by slowing exports as trade uncertainty persisted. Thursday will be a jam-packed day for Eurozone data and monetary policy. The ECB is expected to keep its benchmark rate unchanged, given recent data releases and commentary from officials that the current rate is well-positioned. Eurozone business and consumer surveys for October, alongside unemployment figures from Germany for October and Italy and the eurozone for September. Third-quarter GDP figures are also due for release from Germany, France, Italy, and the Eurozone on Thursday. CPI figures from a host of countries will also be watched Thursday following a slight uptick in inflation last month, although markets widely expect inflation to fall below the ECB’s 2% target in early 2026.

BRITISH POUND: The pound dropped against the dollar, falling nearly 0.5% as markets have slowly been adding to bets that the Bank of England will cut rates sometime before yearend and as fiscal worries continue to weigh on the currency. The pound fell yesterday following a report that 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 reversed overnight gains to fall against the dollar as markets prepare for the Bank of Japan’s policy decision on Thursday. The BoJ is expected to keep rates on hold as it faces domestic uncertainties with Prime Minister Takaichi’s expected fiscal stimulus package and as the bank waits to see the full impact of US tariffs on the economy. Market attention will focus on any clues from the BoJ on the timing of upcoming rate hikes. 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. Elsewhere, President Trump met with Takaichi, where the two leaders signed deals relating to trade and rare earths. On the data front, Tokyo consumer price data for October on Friday offers a leading indicator of country-wide trends, which comes out alongside national industrial production and retail sales figures for September.

AUSTRALIAN DOLLAR: The Australian dollar moved higher after third-quarter 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.

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