Trading Day: Fed uncertainty hits stocks and bonds

ORLANDO, Florida, Dec 8 (Reuters) - 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.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Warner Bros fight heats up with $108 billion hostile bidfrom Paramount 2. Fed ⁠could find itself in a bind as it sets the stage forPowell's successor 3. As Fed meets, elusive r-star still packs a punch: MikeDolan 4. US prepared to open up exports of ‌Nvidia H200 chips toChina, source says 5. Japan's Q3 GDP contraction worsens on weak capex;unlikely to sway BOJ on rate hike

Today's Key Market Moves

* STOCKS: Wall Street's three main indices down as much as0.5%. South Korea, Japan, China up, Hong Kong down, Europe flat. * SECTORS/SHARES: All US sectors decline except tech.Comms services, consumer discretionaries, materials all downaround 1.6%. Paramount Skydance +9%, Warner Bros +4.4%. Netflix-3.4%. * FX: Dollar index rises, JPY, AUD and NOK the biggest G10decliners. * BONDS: 30-year US yield hits three-month high of 4.83%,2s/10s curve steepest in three months near 60 bps. * COMMODITIES/METALS: Oil slides 2%, gold and silver slip.

Today's Talking Points

* Central banks take center stage

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 U.S. 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 also acknowledge many of his colleagues who feel unease about loosening policy further, a similar scenario to the October meeting, only the credibility bar is even higher.

* China's historic $1 ​trillion trade barrier

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 offset the tariff-induced slump ‌in shipments to the U.S.

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.

* It's alright M&A, I'm only bidding

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 world'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.

Will Trump's Fed pick slash rates? The market doesn't think so

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

    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.

LOOSE PURSE STRINGS COULD CLIP ​FED WINGS

    There are two ways of looking at this. 

    Either the risk of more easing in the second half of next year is underestimated, meaning risk assets are underpriced right now as well, or futures markets are correct, and the Fed is not going to be particularly dovish next year, capping the policy-driven upside for stocks and downside for the dollar. 

    All things considered, the latter looks more likely. The consensus median estimate in a recent Reuters poll has the S&P 500 index ending next year at 7,490 points, up only 9% from Friday's close.

    The expectation of limited Fed cuts in 2026 is reasonable considering what the new Fed chair will be inheriting.   

    True, the U.S. labor market has weakened, but inflation has been above the Fed's 2% target for nearly five years and counting.

    And if the market's expectations are correct, the new chair will come in with the Fed having already eased policy by 100 basis points: two cuts earlier this year, one later this week, and one in the first half of next year. And that's on top of the 100 bps of cuts between September and December of 2024.

    That would bring the federal funds target range down to 3.25-3.50%, a level few observers would consider restrictive. Far from it. With inflation still hovering around 3%, real interest rates could be close to zero when the new chair takes ⁠over. 

    What's more, there's a wave of fiscal stimulus coming next year in the shape of the "One Big Beautiful Bill Act" tax cuts and possible $2,000 tariff-funded stimulus checks for every household.

    In an environment like this, how much looser can monetary policy realistically go?

    BRACING FOR HISTORIC DISSENT

    Powell's replacement will also have the daunting task of forging a consensus in one of the most polarized Federal Open Market Committees ever. And that divide could harden next year.

    While the new Fed ​chair will almost certainly tilt the FOMC in a dovish direction, there will be an opposing force. Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, both arguably the most hawkish of all 19 FOMC members, will become voters in 2026. 

    Dissents on the FOMC are not uncommon, of course. They have been a feature of around one in five policy meetings chaired by Powell. They were also seen in nearly half the meetings chaired by his predecessor Janet Yellen and at more than 60% of those run by Ben Bernanke, according to a St. Louis Fed database. 

    But these were mostly single votes. October's decision to cut rates by 25 basis points was only the third time since 1990 that there have been dissents in favor of both tighter and looser policy. And there have already been more dissents this year than at any time in the past three decades.

    Votes of ‌7-5, more reminiscent of Bank of England policy decisions, could thus now be in the cards. Such division would make it challenging to push through any agenda – no matter how hard the new Fed Chair might try.

What could move markets tomorrow?

* Australia interest rate decision * Japan 5-year bond auction * Taiwan trade (November) * Germany trade (October) * US small business optimism index (November) * US 'JOLTS' job openings (October) * US Treasury auctions $39 billion of 10-year notes

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever;)