Hesitation about 'foregone conclusions'

The Federal Reserve delivered an expected quarter point rate cut on Wednesday and an end to its "quantitative tightening" this year. But Chair Jerome Powell ruffled bond market feathers by saying another cut in December was not a "foregone conclusion". 

"Far from it", he added.

Treasury yields and the dollar firmed heading into Thursday's trading day, with markets now seeing only a 70% chance of another Fed cut by year-end. Wall Street indexes stalled after the Fed move and futures remained subdued overnight.

The Bank of Japan, meanwhile, deferred any further interest rate rises for now - knocking the yen back to eight-month lows despite pressure from U.S. Treasury Secretary Scott Bessent earlier this week for the BOJ to keep on tightening.

In South Korea, President Donald Trump hailed his summit with Chinese counterpart Xi Jinping in Busan as "amazing" and gave it a 12 out of 10 rating. But markets seemed less impressed, initially at least. 

The two sides laid out a 12-month agreement that removes the cliff edge of 100% U.S. tariffs next week, seeing Washington halve fentanyl-related tariffs on China to 10% in return for Beijing freeing up rare earth exports and pledging to buy more U.S. soya beans. No mention was made of allowing China to import Nvidia's cutting-edge AI chip Blackwell, despite Trump indicating on Wednesday that it would be on the agenda.

China's stocks and yuan fell back as readouts from the meeting unfolded.

Just before the summit, Trump threw another geopolitical curve ball by ordering the U.S. military to immediately resume testing nuclear weapons after a gap of 33 years.

Meantime, the market reaction to this week's first sweep of megacap tech earnings was also something of a mixed bag.

With AI-related investments still booming despite ongoing fears of a bubble in valuations, Alphabet outshone Microsoft and Meta and its stock jumped 7% ahead of today's bell on another beat - lifting its capex plan for the year to $91-93 billion.

Microsoft and Meta shares went the other direction, however, dropping 3% and 7% respectively overnight. Meta's copybook was blotted by a hefty $16 billion tax charge and Microsoft's forecast of rising spending seemed to unnerve those wary of the cost of sustaining the boom. An outage on Thursday in its Azure cloud computing platform didn't help, even though it appears to have been resolved overnight.

Next up on the corporate diary are Apple and Amazon results after Thursday's close.

Elsewhere, the European Central Bank is expected to leave its key interest rates unchanged at 2% today, with euro zone GDP growth for the third quarter coming in slightly ahead of forecasts thanks to an unexpected French beat. And after Wednesday's election, the next Dutch government looks likely to exclude the far right after support surged for the centrist D66 party.

Sterling's eye-catching slide to its lowest in more than two years against the euro is ostensibly on rising speculation of another Bank of England rate cut this year and possible income tax rises at next month's budget. Prime Minister Keir Starmer rejected calls for a probe into finance minister Rachel Reeves' failure to secure the correct paperwork for a house rental.

For anyone betting on a U.S. dollar rebound, your biggest barrier is in Washington - and not just at the Federal Reserve.

Treasury Secretary Scott Bessent this week publicly prodded the Bank of Japan to keep raising interest rates, an extraordinary intervention that indicates how sensitive the current U.S. administration is to any dollar rally.

Whether you agree with it or not, President Donald Trump's administration has a clear worldview rooted in its ideas about "fair trade" and the link between exchange rates and economic regeneration. A weaker dollar is clearly central to this Weltanschauung.

The Trump administration's economic agenda centres on cutting U.S. trade deficits, forcing U.S. firms to return home to reindustrialise the economy, increasing U.S. export competitiveness and narrowing current account gaps. Importantly, this means less foreign capital in U.S. markets - but it sees that as a feature and not a bug.

At the heart of all this, therefore, is the desire for an effective devaluation of what the Trump team sees as an egregiously overvalued dollar. The greenback's real effective exchange rate has climbed almost 50% in the 15 years through 2024, only retreating about 5% since then.

Officials are unlikely to use the "D" word publicly, but their direction of travel is clear.

Engineering a tacit devaluation in a world of free-floating exchange rates isn't easy, although undermining Federal Reserve independence and pressuring it to make deep interest rate cuts is one way to try.

The problem is that exchange rates are two-sided, meaning the country on the other side has to play ball. 

And that speaks to another pillar of the Trump worldview - namely the idea that other countries have been keeping their currencies artificially weak for years to gain a trade advantage.

Graphics are produced by Reuters.

Of the three tech giants' reporting overnight, investors seemed most impressed by Alphabet's ability to balance its soaring expenses with strong cash flow. Alphabet's capital expenditure of $23.95 billion in the September quarter was 49% of its cash generated from operations. The percentage for Meta, however, is 64.6%, with Microsoft even higher at 77.5%.   

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