Yields, Dollar Lower Following Rate Cut

STOCK INDEX FUTURES

The indexes are mixed with the S&P and Nasdaq trading lower while the Dow hovered close to flatline. Stocks gained sharply following the Fed’s interest rate cut, mainly picking up steam during Fed Chair Powell’s presser where he offered remarks that were more dovish than expected. On the corporate front, Oracle reported mixed second-quarter earnings results Wednesday afternoon, resulting in its shares falling over 12% ahead of the opening bell. Oracle warned that capital expenditures for fiscal 2026 are now expected to be $15 billion higher than the company’s estimates in September. Concerns over the company’s massive AI spending have reignited broader market worries over AI bubble concerns, stoked by sky-high valuations, unrealized productivity gains, and speculation over circular investments, as companies raise billions in debt to build infrastructure.

Weekly initial jobless claims came in at 236,000, higher than expectations and an increase of 44,000 over the previous figure, which was likely impacted by the shortened data collection period over Thanksgiving.

The Supreme Court’s ruling on tariffs is expected to come soon, and President Trump reiterated on Tuesday that the effects of appealing the tariffs could be disastrous for the economy, signaling that he could be expecting an unfavorable ruling towards his trade policies. Trump did suggest that the tariffs could stay but would require a longer implementation process, while calling the ruling the greatest threat to national security in history. In a social media post on Sunday, Trump argued that his method of instituting tariffs is far less cumbersome than other methods, suggesting that if the court knocks down his tariffs, there are still feasible ways to implement them.

CURRENCY FUTURES

US DOLLAR: The USD index is lower after the Fed delivered a less hawkish outlook than markets had expected following its 25 bps rate cut that saw only two voters dissenting from cutting rates. Policymakers at the Fed also left their interest rate projections unchanged from the September meeting, signaling they expect just one more cut in 2026. Powell suggested a rate hike is off the table, prompting traders to price in two additional rate cuts in 2026. However, the Fed’s dot plot points to just one more 25-bps reduction next year.

EURO: The euro is higher, gaining support from a weaker dollar following the Fed meeting as markets look ahead to tomorrow’s final CPI data for November from Germany, France, and Spain. Strong economic data and recent comments from European Central Bank board member Isabel Schnabel have been supportive of euro. Schabel said that the next move out of the central bank may be a rate hike rather than a rate cut, contrary to what most have expected. ECB President Christine Lagarde said on Wednesday the ECB might lift its growth projections again in December given the economy’s unexpected resilience to uncertainty and trade tensions. However, given the current economic landscape of the eurozone, policy moves from the ECB are not expected to happen anytime soon, and 2026 could very well see no action from the central bank.

BRITISH POUND: The pound is higher, holding onto gains as markets await monthly GDP data out Friday. Recently, Bank of England policy members have offered differing opinions over the outlook for interest rates, highlighting a divide on the Monetary Policy Committee ahead of its policy meeting next week. Clare Lombardelli, deputy governor for monetary policy, said she worried more about upside risks to inflation and also said the BoE might be nearing the end of its interest rate cutting cycle. Dave Ramsden, deputy governor for markets and banking, who sought a rate cut in November, said he saw no evidence that inflation was not going to fall as the BoE expects. Markets are pricing roughly an 88% chance that the BoE will lower rates next week, with a second rate cut priced in by June. Subdued wage growth is likely to put a damper on spending and weigh on inflation, as Governor Andrew Bailey has said recently, although markets should continue to monitor upcoming economic data for indicators on inflation direction. The new budget in the UK is expected to knock around 0.4 to 0.5 percentage points off the annual inflation rate in the second half of 2026. Looking ahead, GDP data out Friday for October will be closely watched, with forecasts expecting growth of 0.1%. Also out on Friday will be the RICS house price survey, industrial production, and trade figures.

JAPANESE YEN: The yen is higher, extending gains from the previous session as the dollar weakened sharply after the Fed delivered its third rate cut of the year and signaled a less hawkish outlook than markets anticipated. Markets are focusing on next week’s Bank of Japan meeting, where a rate hike is increasingly expected. Yields on JGBs have recently risen on a mix of market anxiety over fiscal spending, heightened inflation expectations, and expectations that the BoJ will raise rates in December. The rise in yields has alarmed some investors due to its potential effect on the yen carry trade. Governor Kazuo Ueda on Tuesday said that the BoJ could ramp up its plans to purchase government bonds if yields continue to rise sharply, noting that recent moves in rates have been somewhat rapid. Q3 GDP was recently revised to a 2.3% annualized contraction, but the drop in growth is likely to be reversed in Q4. For the Bank of Japan, the figures will likely have little impact on their interest rate decision next week, a meeting where markets have increasingly expected them to raise interest rates. Strong prospects for next year’s spring wage talks have been driving rate hike expectations, as BoJ Governor Ueda has said that the negotiations will be instrumental in deciding on the timing of a rate hike.

AUSTRALIAN DOLLAR: The Aussie is little changed against the dollar as new data showed that Australian employment fell by the most nine months in November as full-time jobs more than reversed a large increase the previous month, while the unemployment rate held steady as fewer people went looking for work. Figures showed net employment fell 23,100 in November from October, when it jumped 41,200. That was far below market forecasts of a 20,000 gain. Full-time jobs dropped by 56,500. However, the jobless rate stayed at 4.3%, when analysts had looked for a rise to 4.4%. The Reserve Bank of Australia kept rates on hold on Tuesday and signaled that the next move out of the central bank is likely to be upwards. Increased risks to inflation have presented themselves in the economy, requiring the RBA to need more time to assess the persistence of the inflationary pressures. Household spending, monthly inflation, and private demand figures have all posted strong readings recently and are likely to stay elevated. Data from the National Australia Bank earlier in the day showed that capacity utilization across the economy was at its highest level in 18 months, which will add to the RBA’s level of concern about the inflation outlook.

INTEREST RATE MARKET FUTURES

Yields are lower across the curve following the Fed’s move to lower rates, while Fed Chair Powell offered a less hawkish outlook than expected. Yields on the long end initially rose following the decision but soon reversed course during the presser, as Powell offered a very-matter-of-fact tone on the course of monetary policy, which was consistent with the Fed’s Summary of Economic Projections. The SEP saw no changed to its expectations for monetary policy, still expecting one 25 bp cut in 2026 and 2027. Powell said that the policy rate is now within broad estimates of neutral, which will allow the unemployment rate to stabilize or tick up one or two more tenths before coming down, while inflation is well placed to reach target after working through tariffs.

Powell also said that he doesn’t think a rate hike is anybody’s base case at this point, just that some people felt that rate cuts should be paused for the time being. It should be noted, however, that three of the 2026 dots in this quarter’s SEP saw the appropriate policy rate for the end of 2026 being 3.875%. Powell noted that if not for tariffs, inflation would be having an easier time returning to the bank’s 2% target, mentioning that more than half of the source of inflation is a result from goods related to tariffs.

The front end of the curve found strong support as the Fed announced  it will begin buying short-dated Treasury bills to support market liquidity from December 12, with the initial round totaling about $40 billion, earlier than what markets had expected. The Fed Desk anticipates that the pace of reserve management purchases (RPM) will remain elevated for a few months to offset large increases in non-reserve liabilities in April. After that, the pace of total purchases will likely be significantly reduced.

The Treasury will auction $22 billion in 30-year bonds today. The spread between the two- and 10-year yields increased to 60.30 bps, while the two-year yield, which reflects short-term interest rate expectations, fell to 3.524%.

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