Rise and shine everyone.

It’s a big day! We have the Fed Rate Decision at 2pm ET followed by Chair Powell’s press conference at 2:30pm ET. And after market close, we hear from Microsoft, Meta, and Tesla.

US Equity Futures are looking better this morning. Nvidia had somewhat of a positive close yesterday, although remain under some pressure this morning. We put out some ideas this morning with stocks that are connected to the AI growth story, and where we see some opportunity.

China is closed for the New Year, but we’re seeing some positive price action in A-shares. Japanese yields are moving slightly higher this morning but the strength in the USD is keeping USD/JPY quite flat.

Australia saw softening in their inflation numbers this morning. This is leading analysts to think that the first RBA rate cut could come as soon as Feb. We think further inflation data will be needed, and the RBA is likely to remain cautious in the face of the US pausing rate cuts.

The US Dollar continues to strengthen.

In other news, The Trump administration announced a temporary “pause” on grants, loans, and federal assistance programs, with Goldman estimating that up to $600 billion (2% of GDP) in payments could be affected, though the actual amount may be smaller. This could create financial challenges for state and local governments, universities, and other recipients, but unlike a federal shutdown, it is unlikely to have an immediate impact on GDP if resolved quickly. Additionally, the administration introduced a “deferred resignation” program, allowing certain federal employees—excluding military, national security, immigration, and postal workers—to resign effective September 30, 2025, while continuing to receive pay and benefits. Reports suggest that 5-10% of eligible employees may opt into the program.

FOMC Preview

We’re quite certain that the Fed will not be cutting rates today. After 100bps of cuts last year, they have been proven wrong about the weakness in the labor market. At this stage, the labor market seems to present very little risk of material weakness.

Meanwhile, inflation has been sticky and there are threats to the inflation story that are taking shape. Most analysts agree that the Fed will likely cut only twice in 2025, with one cut slated until June.

However, there has been some signs of a softer approach on inflation in the past couple of weeks. We’ve heard Governor Waller’s optimism surrounding the inflation scenario and if Fed Chair Powell echoes some of those sentiments, we may see the rate cut probabilities moved up to May or even March.

There will certainly be a question around how long the pause in rate cuts may last, but in true Powell fashion, we think he will decline to comment and points towards data, and the SEP released in December. I don’t even know why they waste a question on this… I suppose they have to ask, at least.

We think the Fed will stick their guns in terms of the rate path, if for no other reason than to reinforce that they are independent. After President Trump’s comment about interest rates being too high, I think the Fed may try to make it a point that they will follow the path based on the data. We remember how Fed Chair Powell reacted when the question of removing him came up!

What could make matters worse? A hint of a hike. We think a hike is firmly off the table for now but there has been recent discussion in the market. If when questioned about this, Chair Powell hesitates, we think the market will take this as a very bad sign and we could see a sell off.

We are certain to hear some discussion around the new Treasury Secretary, Scott Bessent, who has a major task of managing bond issuances ahead of him. When it comes to managing the Debt Ceiling issue, the treasury will like dip into the Treasury General Account (TGA). This puts a strain on liquidity in the system.

In the face of this, Powell may be asked about what the Fed’s decision about QT. We think QT may come to an end by the end of the year, but if there is a possibility of this happening sooner, we’re likely to see downward pressure on long-term yields. We think that there is still some time for this happen.

The Bottom Line - 3 things we will be looking for today:

• Dovishness on the path of inflation

• Fiscal policy concerns, and any discussion around QT

• Any hints about the path of rate cuts given the recent tariff announcements

Chart of the Day

What we’re watching

• The FOMC Meeting - quite likely a hold

• Earnings from Microsoft, Meta and Tesla. ASML has already reported. A few others include ServiceNow (NOW), Lam Research (LRCX), General Dynamics (GD).

• Bank of Canada’s Rate Decision - probably another cut of 25bps, particularly with the threat of tariffs.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)