Focus on dot plot and market weigh up hawkish approach

• European defence stocks fall as US gives Ukraine ultimatum.
• FOMC expected to cut rates.
• Focus on dot plot and market weigh up hawkish approach.

Mainland European equity markets are heading lower in a day that will be dominated by monetary policy out of the Americas. Notably, the defence sector has particularly suffered this morning, with the likes of BAE Systems, Rheinmetall, and Thales lose traction as the end of the Russia-Ukraine war comes into sight. Unfortunately for Europe, the peace agreement appears to be a deal Trump has formed with Russia behind the back of European leaders whom the President has labelled “weak”. Nonetheless, with Ukraine losing ground and the US seemingly giving them until Christmas to agree to a deal that sees flies in the face of many of Zelensky’s red lines. The latest Trump strategy document laid out a plan to focus on the Western Hemisphere, seemingly leaving allies throughout Europe and Asia to fend for themselves. Thus, while Trumps deal may end the war in Ukraine, Europe will likely have to build up a greater degree of self-reliance which undoubtedly means increased defence spending in the years ahead.

Today sees traders and investors focus their attention to the FOMC announcement that will likely bring a third and final 25-basis point cut of 2025. So far we have seen 150-basis points worth of rate cuts from the Fed, and many within the committee will perceive that today’s expected easing should precede a period of patience. After-all, for all the concerns around the job market, unemployment remains low and inflation continues to cause consternation for many. The last Fed minutes had signalled that a number of members perceived a December rate cut as questionable, although commentary since has certainly shifted the narrative back towards a move this time around.

The key question today is whether this turns out to be perceived as a hawkish cut, with the narrative likely to be shaped by expectations of future policy rather than weather we see the Fed cut rates today. With market pricing a 90% chance that the committee ease today, there will be a focus on the dot plot and economic forecasts to guide us on the pathway for 2026. Nonetheless, what the committee cannot account for in their projections is the fact that the Fed could look very different before long, with a new Trump appointed Chair in May and efforts to oust Lisa Cook ongoing. Nonetheless, for today the gains seen for the dollar highlight growing fear that optimism over a cut could soon turn to concern that we have to wait months for the next move. With US markets having already recovered much of the downside seen in November, monetary policy looks an unlikely source of optimism to carry those gains through to year end.