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Fed and ECB Rate Decisions Dominate Market Focus Amid Mixed Economic Data

Market Overview:
The recent hours have seen a somewhat lackluster performance in the markets, though semiconductors have shown resilience (SOX +0.2%). Bond yields have remained relatively stable at manageable levels (Bund 2.58%; T-Note 4.52%), which is crucial.

Federal Reserve Update:
Last night, the Federal Reserve maintained interest rates at 4.25/4.50%, as anticipated, following a series of reductions since September '24. The Fed adopted a more hawkish stance, indicating a reluctance to further lower rates in the near term. They removed the mention of inflation "progressing" towards the 2% target and emphasized that price increases remain "somewhat elevated." This aligns with our expectations, and we do not foresee additional rate cuts until possibly September '25. This stance will likely lead to a stronger USD and a weaker euro as the market absorbs this outlook.

Today's Key Events:
Today, we await GDP releases for the EMU and the US. More importantly, the European Central Bank (ECB) is expected to announce a rate cut of -25 basis points to 2.75/2.90% at 14:15h. The ECB's message will be critical in gauging their commitment to further rate reductions. Given the Fed's pause on rate cuts, the ECB should act swiftly, but a -50 basis point cut is unlikely. The market has already priced in the -25 basis point cut, so no significant reaction is expected. However, the ECB may become more cautious about future cuts due to the risk of imported inflation from a weaker euro, which could necessitate rate hikes later to counteract it.

Economic Data Releases:
Early today, France's 4Q'24 GDP showed modest growth of +0.7%, down from +1.2% in the previous quarter. Last night, Brazil raised interest rates by +100 basis points to 13.25% to combat inflation, which is around +5%. At 10 AM, Germany's GDP will be released, expected to show contraction or stagnation. Italy's GDP, also due at 10 AM, is anticipated to rise to +0.6% from +0.4%. The EMU's GDP will be announced at 11 AM, expected to increase to +1.0% from +0.9% in the previous quarter. The day will conclude with the US 4Q GDP release at 14:30h, projected at +2.6% compared to +3.1%.

Corporate Results and Market Sentiment:
Recent corporate results and guidance have been generally positive (Tesla, Meta, Lam Research, IBM, BBVA), although Microsoft and Sanofi have been weaker. These results should support a modest market rebound (possibly +0.2%), aided by the ECB's rate cut. However, markets remain cautious, awaiting clarity on the impact of DeepSeek on AI and the future rate policies of the Fed and ECB. If the markets rebound slightly and bond yields decrease today, we can be satisfied, as we had advised caution in our 2025 Strategy, expecting a slow and irregular market.

Conclusion:
In summary, while the markets have been subdued, key economic data releases and central bank decisions today will shape the near-term outlook. The Fed's hawkish stance and the ECB's expected rate cut will influence market sentiment and currency movements. Corporate earnings provide some support, but overall caution is advised due to ongoing uncertainties.
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