Fed uncertainty hits stocks and bonds

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Apprehension ahead of the Federal Reserve's policy decision later this week weighed on Wall Street on Monday, while continued selling in U.S. Treasuries pushed the 30-year yield to its highest in three months. 

More on that below. In my column today I look at how rates futures markets are pricing Fed policy after Chair Jerome Powell is replaced next year. Given all the talk of an uber-dovish Trump loyalist being nominated, the answer may be surprising.

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A crucial clutch of central bank policy decisions this week kicks off on Tuesday with the Reserve Bank of Australia, which will be followed by verdicts later in the week from Canada, Brazil and Switzerland, and of course, the big one from the US on Wednesday. 

Another 25 basis point cut is widely expected, but Chair Jerome Powell faces a tricky task. Presuming the Fed does deliver a "hawkish cut", he has to back the decision, yet acknowledge the unease among many of his colleagues feel about loosening plicy further. A similar scenario to the October meeting, only the credibility bar is even higher.

China's trade surplus so far this year is now above $1 trillion for the first time, as surging exports to Europe, Australia and Southeast Asia more than offsetting the tariff-induced slump in shipments to the US.

The landmark breakthrough is bound to intensify debate around China's central part in global trade imbalances, its exchange rate, and its growth strategy for the next five years. Hint: exports are set to play a prominent role. 

On Friday, Netflix said it had reached a deal to buy Warner Bros Discovery for $72 billion. On Sunday, U.S. President Donald Trump warned the tie up could present an antitrust "problem". And on Monday, it got even more intriguing as Paramount Skydance swooped in with a hostile $108 billion bid for Warner Bros. 

Meanwhile in Europe, de-merger activity was the name of the game as the Magnum Ice Cream Company completed its spinoff from Unilever to become the word's largest ice cream business. It began trading in Amsterdam, and Unilever shares fell 2% in London. Newly-consolidated Unilever shares will begin trading on Tuesday. 

Financial pundits seem convinced that the new Federal Reserve chair will be an uber-dovish Donald Trump loyalist intent on slashing interest rates regardless of the economic fundamentals. Markets aren't buying it.

Jerome Powell, whose eight-year term as Fed chair ends in May, is widely expected to be replaced by the President's top economic adviser Kevin Hassett. Trump indicated as much last week, saying he has narrowed his list down to one person and later introducing Hassett at a White House event as "a potential Fed chair."

Hassett is undoubtedly a Trump loyalist. But market pricing clearly shows traders don't think a Hassett-led central bank will loosen policy anywhere near as much as Trump has indicated. 

In fact, barely 75 basis points of easing is expected by the end of next year, according to rates futures markets. That's only three quarter-percentage-point rate cuts – two of them before Powell leaves, in all likelihood, and only one in the second half of 2026 with the new chair at the helm.

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