Today's markets: Shares drop on US rate expectations

Europe has shaken off the dire sessions in the US and Asia overnight and posted positive numbers this morning. The FTSE 100 is up 0.16 per cent with banks leading the rise, with long-term yields on the rise, while shares in Germany are up 0.36 per cent. The Cac is flat. 

However, indices across the world fell as soft economic data showed the US economy was in good health, sending traders into a frenzy and very much taking us back to the good news is bad news days. The S&P 500 fell 1.1 per cent with the tech-heavy Nasdaq falling 1.9 per cent. This continued into Asia with the Hang Seng and Topix falling 0.9 and 0.6 per cent respectively.

So what happened, first the ISM PMI report, which tracks activity in the US’s services sector, rose to 54.1 from 52.1 in December, far higher than the 53.3 expectation. Anything over 50 shows the sector is growing. Later on, job vacancy data, known as Jolts, showed strong demand for US workers, with 7.7mn openings. As a standalone, neither means much, but we know how eager traders have been to pin things on such soft data in the past, it doesn’t seem like there have been any resolutions to change that in 2025. The data points to the fact that the Federal Reserve may be unable and unwilling to keep cutting rates with such inflationary signals. A growing industry and demand for workers are both inflationary, and as such, traders sold shares, sold bonds to push up long-term yields and cut bets on when the Fed might next cut rates.

The next meeting is at the end of this month, and no one expected any action then and that feeling has only become stronger. However, the odds of a 0.25-point cut by July have halved from 70 per cent to 35 per cent, with some traders suggesting there will now only be one cut this year. Before the last meeting in December, where to be fair to Jerome Powell and co, they did signal slower cuts this year, traders were looking at three to four cuts.

So is it all a bit much? Well, perhaps. As stated, the Fed literally said they were conscious of this just before Christmas and would slow down the pace of rate cuts, so why the market has reacted like this now is perplexing, when they already threw the toys out of the pram in December. The Jolts measure is far from perfect, and the ISM surprise just isn’t that surprising, according to Pantheon Economics, which retained a very dovish stance for the year. Here’s Samuel Tombs: “We think yesterday’s rise in expectations for the Fed funds rate was unwarranted by the economic data and still expect the Committee to ease again in March, and probably by a total of about 1 percentage point this year.” Quite a call, we’ll revisit that one later down the line I’m sure.

While the FTSE is posting green numbers, UK government bonds are not with yields on the rise, which could also end up affecting what the Bank of England does this year We all knew Labour’s commitment to not increase taxes again any time soon was a bit hopeful, but if yields keep on going up, hitting government borrowing costs, we’ll have to be wary of what the Spring Statement brings.

 By Taha Lokhandwala