S&P 500 Slips as Fed Signals Higher-for-Longer Rates Ahead of Big Tech Reports | Daily Market Analysis

Key events:

• Eurozone - Deposit Facility Rate (Jan)
• Eurozone - ECB Interest Rate Decision (Jan)
• USA - GDP (QoQ) (Q4)
• USA - Initial Jobless Claims
• Eurozone - ECB Press Conference

The S&P 500 closed lower on Wednesday as investors processed the Federal Reserve's decision to maintain interest rates, signaling that a pause doesn't imply immediate cuts. This pause comes at a pivotal moment ahead of earnings reports from key tech companies, making market sentiment more cautious. The Dow Jones Industrial Average dropped by 137 points, or 0.3%, while the S&P 500 and NASDAQ Composite both fell 0.5%.

This week is crucial for tech stocks, with heavyweights such as Microsoft, Meta, and Tesla set to release their earnings reports after the market closes on Wednesday. Apple is also on deck for Thursday. These companies, often grouped together in the "Magnificent 7," have driven much of the market's growth in recent years. Analysts will likely focus heavily on artificial intelligence (AI) as a theme, particularly after a sharp market dip spurred by concerns surrounding DeepSeek, a recent AI-focused market development. Tech executives have already outlined their plans to invest billions into AI infrastructure, hoping to eventually monetize the technology and boost their long-term growth prospects.

On the commodities front, gold prices showed modest gains during Thursday's Asian session, though momentum seemed weak as the metal remained confined within the weekly range. This was largely due to the Fed's hawkish stance on interest rates, which supports the US Dollar. At the same time, a drop in US Treasury yields, alongside concerns over President Donald Trump's protectionist policies, offered a measure of support to the safe-haven asset.

Trump's calls for lower interest rates, paired with the ongoing reduction in US inflationary pressures, raise the likelihood of further rate cuts by the Federal Reserve. This backdrop favors gold, and any price pullbacks are likely seen as buying opportunities. Despite the strong US Dollar, the overall trajectory for gold remains upward, buoyed by these supportive factors.

Meanwhile, the Federal Reserve's decision to hold rates steady and signals that it would refrain from lowering borrowing costs in the short term were in focus after the central bank's two-day policy meeting. Fed Chair Jerome Powell downplayed speculation about upcoming rate cuts and emphasized that political factors, such as President Trump's stance on trade, wouldn't dictate the Fed's decisions. Powell's comments reinforced the idea that rates would likely stay elevated for a while, especially in light of ongoing inflation risks tied to Trump's policies.

The 10-year US Treasury yield failed to maintain its post-FOMC gains, capping the US Dollar's strength. This struggle by the US Dollar to build on its recent strength opened the door for gold to climb higher.

Additionally, the Japanese Yen gained some strength, buoyed by growing expectations that the Bank of Japan would raise interest rates again. Recent comments from former BoJ officials have reinforced this view, citing strong economic growth and rising wages as justifications for continued rate hikes. The narrowing of the yield gap between the US and Japan has further supported the Yen.

The Australian Dollar also showed signs of recovery, breaking its three-day losing streak against the US Dollar. The release of positive export data on Thursday revealed a 3.6% quarterly rise in export prices for Q4 2024, reversing a decline from the previous quarter. This was the first quarterly increase in export prices since Q4 2023. Meanwhile, import prices also rose slightly, driven by higher gold prices as investors sought safe-haven assets amid economic uncertainty.

Amid easing inflation expectations, Australian financial institutions, including ANZ, CBA, and Westpac, have shifted their rate cut forecasts. While the Reserve Bank of Australia had previously indicated no cuts until later in 2025, the possibility of a 25 basis point reduction in February has grown stronger. The RBA has maintained its key interest rate at 4.35% since November 2023 but emphasized that it would not lower rates until inflation sustainably hits its 2%-3% target.

In the Eurozone, the Euro showed a slight recovery after three consecutive losses, edging higher to around 1.0420 against the US Dollar during the Asian session. This uptick was attributed to a technical correction in the US Dollar. However, the Euro faces headwinds as market participants expect the European Central Bank to reduce rates further at its upcoming meeting, with expectations for a 25 basis point cut that would bring the Deposit Rate to 2.75%. This potential rate cut could put further pressure on the Euro.

The upcoming release of fourth-quarter GDP data from the Eurozone and Germany will likely be a key focus for traders, as it could provide more insight into the region's economic growth. Later, attention will shift to the US GDP report, where traders will scrutinize the data for signs of strength or weakness in the American economy.