Fed Mins to Sway Rate Cut Odds, Dow Direction

A reduced economic data calendar ahead of the US holidays could see heightened volatility while traders try to figure out how to prepare for 2025.

Cutting or Changing Course?

The FOMC is set to release the minutes from its previous meeting tonight, which took place shortly after the election victory of Donald Trump. Although the Fed went ahead with the widely expected quarter-point interest rate cut at the time, there was speculation across the board that new policies under Trump in the coming year might lead the Fed to keep rates higher than initially expected. Currently, markets are pricing in a 55-45 probability of a rate cut by the Fed. While not a particularly close call, the clarity provided by FOMC officials in the minutes could sway the markets in either direction. This follows a weakening of the US dollar after the appointment of hedge fund manager Scott Bessent as Trump's prospective Treasury Secretary, which reassured markets as he was perceived as less aggressive on tariffs than many analysts had feared.

In the aftermath of the previous meeting, the FOMC's summary of rate projections, known as the "dot plot matrix," implied that a rate cut would materialise in December. Traders will be keen to see if the election outcome has changed the Fed's view on inflation and whether the final rate cut for the year is warranted. No dot-plot will be released at this meeting, which introduces an additional layer of ambiguity as traders and analysts will likely try to parse each member's views in the minutes to discern any shift that might suggest the next dot-plot will show higher rates than previously projected.​

Is Inflation Really Slowing?

The latest post-election data suggests that while optimism in the business community has led to higher prices, this has yet to translate into higher prices. The preliminary PMI readings for November showed that prices rose at the slowest pace since the pandemic, implying that the inflation will show that price growth has continued to ease. However, the Fed's preferred inflation measure, the PCE, is ahead of the CPI release on Wednesday.

Markets expect PCE to show that inflation remained sticky, if not outright reversing. A rebound in prices later in the year is somewhat expected, with economists projecting that inflation will continue to decline next year. In the meantime, the projection is for the annualised core PCE price index for November to be 2.8% from 2.7% previously and the monthly core reading to stay unchanged at 0.3%.

Further signs that the Fed might proceed "cautiously", in the words of FOMC member Michelle Bowman, might weigh on the Dow Jones. Its high weighting of tech stocks such as Apple and Microsoft makes it vulnerable to expectations for higher rates, as these two companies alone eclipse the entire financials weighting. On the other hand, if inflation shows signs of receding and the FOMC minutes imply the Fed is still firmly looking at rate-cutting, it could boost the premier US index.​

Dow Jones to Record Heights

Despite the bullish sentiment at record heights, the Dow Jones may be forming an ending wedge pattern that could complete at the upper trendline connecting 41,420 and 44,540 levels. There is a possibility of an overshoot towards the 45,500 or 46,000 round resistance levels is possible. However, if support at 44,500 is breached and the index declines to 43,370, the risk of breaking below the lower wedge trendline will increase. In such a scenario, the index could potentially slide towards 41,630.​

Source: SpreadEx / Wall Street

Key Takeaways

A reduced economic data calendar ahead of the US holidays could lead to heightened volatility with the FOMC minutes expected to provide clarity on whether the Fed keeps rates higher than expected under Trump. Markets are currently pricing in a 55% probability of a rate cut. Still, the minutes could sway sentiment as post-election data suggests optimism has led to higher prices despite potentially slowing inflation. The PCE inflation data and FOMC minutes could impact the Dow Jones, which is vulnerable to rate expectations due to its tech stock weighting.