Following losses in Asia and on Wall Street overnight, European stock exchanges were expected to start lower after data indicated that the U.S. economy and labor market remained robust, leading to expectations that the Federal Reserve will adopt a cautious approach in its rate-cutting strategy.
Eurostoxx 50 futures decreased by 0.3%, and German DAX futures fell by 0.23%. The rise in bond yields is likely to exert pressure on technology stocks in Europe, particularly after they reached a five-month high on Tuesday.
Investor attention in 2025 has shifted towards changing U.S. rate expectations, amid increasing policy divergence between the U.S. and other economies, along with the potential for tariffs once President-elect Donald Trump resumes office on January 20.
In December, the Federal Reserve projected only two rate cuts for 2025, a reduction from its previous forecast. Currently, markets are anticipating 38 basis points of easing this year, with the first cut expected to occur in July.
Conversely, the European Central Bank is anticipated to implement significant rate cuts, with traders pricing in 99 basis points of easing this year, despite eurozone inflation accelerating in December, as reported on Tuesday.
As a result, the euro remains close to the two-year low of $1.022475 reached last week, trading at $1.035375. Investors are concerned that the single currency may drop to the critical $1 level this year due to uncertainties surrounding tariffs.
The yen was last quoted at 158.12 per dollar after reaching 158.425 on Tuesday, a level not seen since July when Tokyo intervened to stabilize the currency. It depreciated over 10% against the dollar last year and has had a challenging start to 2025.
In the stock market, MSCI's broadest index of Asia-Pacific shares outside Japan declined by 0.5%. On Wall Street, all three major indexes closed lower as economic and employment data heightened inflation concerns.
China's CSI300 Index, a key benchmark for blue-chip stocks, dropped over 1% on Wednesday, hitting its lowest point in more than three months. This shaky start to the year has prompted regulators and authorities to step in and calm investors' worries.
Meanwhile, Hong Kong's Hang Seng Index also fell by just over 1%, reaching its lowest level since late November, and the Chinese yuan hit a new 16-month low.
US DATA BOOSTS DOLLAR
On Tuesday, data revealed that U.S. job openings unexpectedly rose in November, even as hiring slowed down. This suggests that the labor market is cooling, but not enough to push the Fed into a hurry to lower rates.
Mansoor Mohi-uddin, chief economist at Bank of Singapore, noted, "This data backs our belief that the U.S. economy is on track for a soft landing this year, which should benefit risk assets while limiting the Fed to just 1-2 more rate cuts."
Following the data release, benchmark 10-year Treasury yields climbed to 4.699%, the highest since April, settling at 4.681%.
As a result, the dollar index, which tracks the U.S. currency against six major currencies, stood at 108.65, close to last week's two-year peak. The index has risen 7% in 2024 as investors anticipate that U.S. rates will remain elevated for an extended period.
Looking ahead, investors are keenly awaiting the payrolls report set for Friday to determine when the Fed might next lower rates. According to a Reuters survey, non-farm payrolls likely increased by 160,000 jobs in December, following a surge of 227,000 in November.
James Knightley, chief international economist at ING, commented that the mix of solid growth, ongoing inflation worries, and a jobs market that’s slowing but not collapsing is leading the market to scale back expectations for rate cuts this year.
He added, "The risk is that if we see a stronger jobs report and another 0.3% month-on-month core CPI reading next week, those expectations could be trimmed even further."
The U.S. inflation report for December 2024 is set to be released on January 15.
In the commodities market, oil prices saw an uptick, with Brent crude rising by 0.67% to $77.57 per barrel, while U.S. West Texas Intermediate (WTI) crude increased by 0.85% to $74.88 a barrel.