At a Glance
- Major US stock indices—S&P 500, Dow Jones, and Nasdaq 100—opened higher, with futures also indicating gains.
- Markets are anticipating a 98% chance of a 0.25% rate cut by the Federal Reserve at its upcoming FOMC meeting.
- Positive developments in US-China trade relations have provided market support, easing trade tensions.
- A significant number of S&P 500 companies are scheduled to report earnings this week, including tech giants like Alphabet, Meta, Microsoft, Apple, and Amazon.
- Key economic data releases are affected by the ongoing US government shutdown, which continues to weigh on market sentiment.
Market Movements and FOMC Anticipation
US stocks experienced a modest uptick in early trading, with the S&P 500 Index ($SPX) advancing by 0.22%, the Dow Jones Industrials Index ($DOWI) gaining 0.61%, and the Nasdaq 100 Index ($IUXX) rising by 0.39%. December E-mini S&P futures (ESZ25) were up 0.25%, while December E-mini Nasdaq futures (NQZ25) added 0.31%.
The market sentiment is largely influenced by the impending two-day Federal Open Market Committee (FOMC) meeting, which commenced today. A significant market consensus, with a 98% probability, anticipates a 25 basis point rate cut at this week’s conclusion. Looking ahead, the market is pricing in a 94% chance of another 25 basis point reduction at the December 10 FOMC meeting. Analysts project a cumulative rate cut of 115 basis points by the end of 2026, bringing the effective federal funds rate down from its current 4.10% to 2.95%.
FOMC Meeting Focus: Balance Sheet Operations
This week’s FOMC meeting will not include the release of the Summary of Economic Projections, which typically features the Fed’s dot plot outlining future interest rate expectations. Consequently, market participants will rely on Fed Chair Powell’s post-meeting press conference for insights into monetary policy, rather than updated projections from other Fed officials.
💡 However, there is considerable market interest in any potential signals regarding the Federal Reserve’s plans to end its quantitative tightening (QT) program. A halt to QT would involve the Fed ceasing to allow its balance sheet to shrink. This move is widely viewed as a bullish catalyst for both equity and fixed-income markets, as it would cease the reduction of liquidity within the US financial system.
Economic Data Overview
Recent economic indicators have painted a mixed picture. The August FHFA US House Price Index showed a more robust than expected increase of 0.4% month-over-month, contrasting with a forecast of -0.1%. Similarly, the S&P Case Shiller US 20-city house price index demonstrated strength, rising by 0.19% month-over-month and 1.58% year-over-year, surpassing expectations of -0.10% and +1.30% respectively.
In the manufacturing sector, the October Richmond Fed manufacturing index improved significantly, rising 13 points to -4, which was a more favorable outcome than the projected increase to -12. Consumer sentiment, as measured by the October Conference Board US Consumer Confidence Index, experienced a slight dip, falling 1.0 point to 94.6 from a revised 95.6, yet this figure still exceeded the expected reading of 93.4.
Trade Relations and Earnings Season
Stock markets are benefiting from the positive momentum generated by news of a tentative trade agreement between the US and China. Negotiators met over the weekend, and an official announcement is anticipated during the summit between Presidents Trump and Xi. This agreement reportedly removes the threat of a 100% tariff on US imports from China, scheduled to take effect on November 1. Furthermore, China has agreed not to restrict rare earth metal exports for at least a year and to increase its purchases of US soybeans. Progress has also been reported on shipping fees and efforts to curb the export of fentanyl and its precursors to the US. Discussions may also include an agreement allowing continued US consumer access to TikTok.
This week is particularly heavy on earnings reports, with 173 companies from the S&P 500 set to announce their financial results. Notably, five of the Magnificent Seven companies, including Alphabet, Meta, and Microsoft, are reporting on Wednesday, followed by Apple and Amazon.com on Thursday. Q3 earnings have shown resilience so far, with 84% of reporting S&P 500 companies surpassing forecasts, marking the strongest quarter for earnings beats since 2021. Despite this, Q3 profits are projected to have grown by 7.2% year-over-year, the slowest pace in two years, and sales growth is expected to moderate to 5.9% year-over-year from 6.4% in Q2.
Geopolitical and Trade Tensions
US-Canada trade relations remain a point of monitoring following President Trump’s statement regarding a potential 10% tariff on US imports from Canada. This proposed measure was in response to an advertisement by the provincial government of Ontario critical of tariffs. While initial reports indicated a halt in trade negotiations due to the advertisement, the imposition of a new tariff marks an escalation, even after Ontario agreed to pause the campaign.
📌 Additionally, the legality of President Trump’s imposition of reciprocal tariffs is under scrutiny. Oral arguments are scheduled before the Supreme Court on November 5 concerning the validity of these tariffs. Lower courts have previously ruled against their legality, citing claims of emergency authority as baseless. A Supreme Court ruling in favor of these decisions would necessitate refunds of collected tariffs and could restrict the President’s future ability to impose tariffs outside of established trade law. Observers anticipate a final ruling by late 2025 or early 2026.
US Government Shutdown Impact
The US government shutdown has extended into its fifth week, exerting pressure on market sentiment and the broader US economy. The shutdown has caused delays in the release of crucial economic reports, including weekly unemployment claims, September’s unemployment and payroll data, August’s trade balance, and September’s retail sales, PPI, housing starts, industrial production, and leading indicators, among others. Bloomberg Economics estimates that approximately 640,000 federal workers have been furloughed, which could inflate jobless claims and potentially raise the unemployment rate to 4.7%.
Global Market Performance
Overseas stock markets are showing mixed performance today, with several major indices trading lower. The Euro Stoxx 50 remains largely unchanged. In Asia, China’s Shanghai Composite closed down 0.22%, reversing some of its gains from the previous day’s rally of 1.18%. Japan’s Nikkei Stock 225 also declined, closing down 0.58% after a strong rally of 2.46% on Monday.
Interest Rates and Treasury Markets
December 10-year T-notes (ZNZ5) are trading down by 2 ticks, with the 10-year T-note yield rising by 1.1 basis points to 3.991%. Treasury prices are exhibiting caution ahead of Wednesday’s FOMC decision. Market sentiment is also being affected by the recent US-China trade agreement, which has reduced the demand for safe-haven assets like Treasury securities. An increase of 0.3 basis points in the 10-year breakeven inflation expectations rate, now at 2.290%, is also contributing to downward pressure on T-note prices.
⚡ Underlying support for T-note prices stems from the ongoing US government shutdown. The potential for increased job losses, reduced consumer spending, and a weakened US economy could encourage the Federal Reserve to continue its rate-cutting cycle.
European government bond yields are mixed. The 10-year German bund yield is up by 0.2 basis points to 2.617%, while the 10-year UK gilt yield has decreased by 1.1 basis points to 4.391%.
📊 Swaps markets indicate a low 1% probability of a 25 basis point rate cut by the European Central Bank (ECB) at its upcoming policy meeting on October 30.
US Stock Movers
The Magnificent Seven stocks are all trading in positive territory. Microsoft (MSFT) is leading the gains with an increase of over 2%, while Nvidia (NVDA) is up by more than 1%.
Nvidia (NVDA), Marvell Technology (MRVL), and Intel (INTC) are also showing gains greater than 1%. However, many other semiconductor stocks are giving back some of their recent advances.
✅ United Parcel Service (UPS) has surged over 9% following the release of favorable adjusted earnings. PayPal (PYPL) is also up more than 9%, spurred by a CNBC report indicating that OpenAI has agreed to integrate PayPal’s digital wallet into ChatGPT.
On the downside, D.R. Horton (DHI) has fallen over 3% after reporting an earnings miss. Royal Caribbean (RCL) is down more than 7% due to an earnings miss.
Expert Summary
Markets are observing key developments including an anticipated Federal Reserve rate cut, a tentative US-China trade agreement, and a heavy earnings week. Economic data presents a mixed outlook, while the ongoing US government shutdown continues to introduce uncertainty.