The Fed’s next move has world markets on edge

U.S. shares are set to open flat on Wall Street Wednesday morning as traders await the outcome of the Federal Reserve’s final policy meeting of the year.

They’re also waiting to hear what Fed Chair Janet Yellen will have to say in her post-announcement press conference: Will she provide any strong clues as to the direction of monetary policy in the coming year, now that the central bank has had a month to mull over what a President Donald Trump might mean for the U.S. economy?

With financial markets pricing in a quarter percentage point hike to a range of 0.50 percent and 0.75 percent as a near-certainty, more interest will focus on what Fed officials say about the outlook given low unemployment and the prospect of higher inflation in light of the recent rise in oil prices.

At present, the futures markets are pricing in another two interest rate hike next year.

Neil MacKinnon, global macro strategist at VTB Capital, says anything to suggest more than this would be interpreted as tilting the Fed to “a hawkish bias,” especially if accompanied by a significant upgrade to inflation forecasts.

Anything hawkish could weigh on stock markets, already at record-highs, but give a further lift to the dollar.

Indeed, U.S. stocks indexes have pushed powerfully to new highs. Economic growth has rebounded, with the Atlanta Fed’s GDPNow estimate of fourth-quarter growth now coming in at 2.6 percent. The two-year corporate earnings recession is over as S&P 500 companies returned to year-over-year profits growth in the third quarter, thanks in part to the rebound in energy prices. The labor market is strong, with the unemployment rate fell to 4.6 percent in November.

And most important, inflationary pressures are building because of the rise in energy prices and evidence of nascent wage pressure amid a stalling in labor productivity.

But anxiety over what happens next was seen in stock markets around the world on Wednesday, which are mostly lower, with the dollar stable as investors anticipate the Fed’s next move.

European stocks got off to a weak start on Wednesday, after Asian indexes mostly closed lower.

As of around 8:15 a.m. Eastern, European indexes were down slightly. Britain’s FTSE 100 was down 0.1 percent to 6,962, and Germany’s DAX was 0.2 percent lower to 11,261. France’s CAC 40 lost 0.4 percent to 4,785.

Dow and S&P 500 futures were nearly flat, lower by less than 0.1 percent.

In Asian trading, Japan’s Nikkei 225 finished nearly unchanged at 19,254, just a titch above its one-year high close on Tuesday. South Korea’s Kospi gained less than 0.1 percent to close at 2,037, and India’s Sensex was up 0.4 percent at 26,584.

Hong Kong’s Hang Seng index finished almost flat at 22,457, but the Shanghai Composite Index fell 0.5 percent to 3,141. Australia’s S&P/ASX 200 rose 0.7 percent to 5,585.60. Stocks in Southeast Asia were mixed.

“Against a backdrop of solid U.S. economic data, an improving jobs market and changes that the Trump administration could potentially bring to the capital market, expectation for a 25-basis-points rate hike by the Federal Reserve hit 100 percent several weeks ago,” said Margaret Yang of CMC Markets.

The Bank of Japan’s quarterly “tankan” survey of more than 10,000 companies found slightly improved confidence among big Japanese manufacturers as the yen has weakened against the U.S. dollar since Mr. Trump won the Nov. 8 election. But the survey found most companies expect weaker profits and investment in the coming quarter.

Benchmark U.S. crude fell 99 cents at $51.99 per barrel in New York. The contract rose 15 cents to close at $52.98 on Tuesday. Brent crude, the international standard, lost 61 cents to $55.11 a barrel in London.

The dollar was stable against Japan’s currency, at 115.17 yen, and the euro was up almost 0.1 percent at $1.0637.