Will Stocks Sink If Fed Rate Cuts Seem Delayed After ISM Data?
Will Stocks Sink If Fed Rate Cuts Seem Delayed After ISM Data?
By:Ilya Spivak
Can stock markets stomach delayed Fed interest rate cuts? All eyes turn to ISM data for a clue.
- Wall Street continued to ignore geopolitical risk after the US raid in Venezuela
- Markets in Latin America rose for a second day as crude oil prices tellingly fell
- Fed rate cut bets are back in play, with ISM service sector data now in focus
Stock markets continued to drift higher as traders convinced themselves to look past a surprise US raid in Venezuela to capture and extradite president Nicolas Maduro. The S&P 500 rose 0.63%. The bellwether US equities index has now erased all of the losses sustained last week, returning to a range top capping prices since mid-December.
Perhaps most tellingly, Latin American markets roared higher. The iShares Latin America 40 ETF (ILF) is up 3% so far this week. Moreover, markets sped upward in countries that have been unfavorably name-checked by US President Donald Trump. The Global X MSCI Colombia ETF (COLO) and the iShares MSCI Brazil ETF (EWZ) are up 6.43% and 2.83%.
Fed rate cut outlook back in focus as markets look past geopolitics
Meanwhile, crude oil prices erased yesterday’s modest uptick to close at the weakest level in almost two weeks. If there was any real concern about what the US action might mean for energy supply disruption – unlikely though that seemed even at first blush – it now seems to have been put convincingly to rest.
This brings the markets back to familiar territory as a batch of incoming US economic data puts the spotlight back the Federal Reserve and the expected interest rate cut path. The S&P 500 has conspicuously failed to reach a higher high since Fed Chair Powell admonished markets not to over-extrapolate rate cut bets after October’s policy meeting.
A report from the Institute for Supply Management (ISM) is expected to show that the pace of service sector activity growth slowed a bit in December. Taken together with a companion manufacturing gauge published earlier in the week, that result looks set to bring overall (“composite”) growth to a three-month low.
Will stocks lose steam if solid ISM data points to FOMC standstill?
This is less scary than it sounds. First, services activity growth would be slowing from a nine-month high in this scenario, and only gently so. Second, the economy-wide downtick would only slow activity back to its trend average since the beginning of 2025. That seems benign for the same quarter as the longest US government shutdown on record.
As it stands, the markets seem convinced that the central bank will remain on hold this month. The probability of a 25-basis-point (bps) cut at the late-January gathering of the Federal Open Market Committee (FOMC) is priced at just 17.2% in benchmark Fed Funds futures.
However, traders have discounted two such cuts this year, with the first expected to appear in April and the second no later than September. For their part, FOMC officials have only committed to a single cut in their Summary of Economic Projections (SEP). They’ve stuck to this view since June last year, reaffirming it in September and December.
An ISM result that registers broadly in line with expectations seems unlikely to convince the US central bank to act with greater urgency, leaving the markets disappointed. This could put stock markets under pressure as traders look ahead to the US jobs report as well as consumer confidence statistics due later in the week.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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