US Stocks Fluctuate Before Fed; Brazil on Edge.

US stocks wavered as investors braced for the Federal Reserve’s final policy decision of 2024 and its outlook for next year.

The S&P 500 was little changed after pushing higher earlier while the Nasdaq 100 fluctuated between modest gains and losses. The yield on the 10-year Treasury hovered around 4.39%. Bloomberg’s gauge of the dollar rose after wavering earlier. 

In emerging markets, Brazil’s real has been the worst-performing currency in the world over the past four sessions, adding to a 21% drop this year against the greenback. Brazil’s financial markets are on the edge as investors lose faith in the government’s ability to contain a deepening fiscal crisis.

In the US, all eyes are on the Fed. With a quarter-point cut by the Fed almost fully priced in for Wednesday, investors are keen to hear the central bank’s outlook for 2025. A couple of factors add to the uncertainty: inflation has decelerated at a slower pace while the economy has remained strong. The possible inflationary impact of key policies under President-elect Donald Trump’s incoming administration could also complicate matters for the Fed.

“Investors are looking for the Fed to reiterate their view that the economy is tracking for a soft-landing and that the FOMC is not overly concerned with the latest uptick in inflation data that could signal a sustained “pause” in rate cuts,” wrote Tom Essaye, president and founder of Sevens Report and a former Merrill Lynch trader.

The Fed’s dot plot had projected a full percentage point of rate cuts for 2025, following a similar magnitude of easing this year. Now, money markets are pricing in that a cut on Wednesday would be followed by less than two 25 basis-point reductions next year.

A hawkish tone in Powell’s press conference would likely trigger renewed selling pressure in stock markets and push bond yields higher, Essaye said.

Traders are also parsing data on Wednesday that showed US new-home construction unexpectedly fell in November.

“I don’t expect the market to move hugely today,” said Guy Miller, chief strategist at Zurich Insurance Co. Yields already reflect potentially fewer rate cuts and “that there is a bit more risk premium already baked into that in terms of the inflation dynamic,” he said.

Still, while Wall Street banks have started anticipating fewer reductions, some interest-rate option traders are betting the market’s view is too hawkish and that the Fed would ease policy more closely to what it projected in September: the equivalent of four quarter-point cuts.