Markets Daily: The Fed and bond market agree

US stock futures pointed to muted trading on Wall Street after tech-led gains in the previous session. The S&P 500 is on track for a 25% adv

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Five things you need to know

US stock futures pointed to muted trading on Wall Street after tech-led gains in the previous session. The S&P 500 is on track for a 25% advance this year, with the top seven biggest technology stocks accounting for more than half of the gains. Taiwan Semiconductor shares touched a record high Honda's stock climbed after the carmaker said it would repurchase up to ¥1.1 trillion ($7 billion) in shares by next December, ahead of a deal with Nissan. It also sketched out plans for a drawn-out pact that amounts to an acquisition  A US national security panel has deadlocked on the sale of United States Steel to Nippon Steel, opening the door for President Joe Biden to block the transaction Japan warned speculators not to target the yen as the currency continues to show weakness. Goldman Sachs said the yen's current level is positive for overseas investors to buy Japanese stocks China plans to sell a record 3 trillion yuan ($411 billion) of special treasury bonds in 2025, Reuters reported, as the government seeks to boost the slowing economy Markets Daily will return on Friday. Happy holidays to those who celebrate! In the meantime, think about which assets will fare the best next year and let us know your thoughts via the Markets Pulse survey.

Together at last

Wall Street and the Federal Reserve haven't exactly been in lockstep in recent years. Investors mostly failed to forecast how high interest rates would go after the pandemic and then thought they would be cut much faster than they were. But those paid to predict the bond market may be taking their cues from the central bank into 2025. Strategists at major banks envisage short-term US Treasury yields dropping over the year, despite the risk President-elect Donald Trump's trade and tax policies play havoc with such predictions by reigniting inflation. Market-watchers are readying for a drop in the two-year Treasury note's yield, which is more sensitive to the Fed's interest-rate policy. They see a decline of at least half a percentage point from the current level 12 months from now. "While investors are likely to be myopically focused on the pace and magnitude of rate cuts next year, investors should take a step back and recognize that the Fed is still in cutting mode in 2025," a JPMorgan Asset Management team led by David Kelly said in the firm's annual outlook. Still, the Fed signaled fewer rate reductions next year at its meeting this month which could still complicate the path for yields. Estimating how long-term borrowing costs will fare in the year ahead is perhaps even trickier. "Even as the Fed is likely to continue lowering the policy rate, pulling front-end yields lower, many of the forces that argue for longer-term yields to remain elevated are still in place: a high neutral rate, elevated rate volatility, the inflation risk premium, and large net issuance amid price-sensitive demand," a Barclays team led by Anshul Pradhan wrote in a note. For now, Morgan Stanley and Deutsche Bank are among the most bullish and bearish, respectively, on the bond market. Morgan Stanley sees "downside risks to growth" and an "unexpected bull market" for investors. Anticipating a speedier pace of Fed rate cuts than other banks, the firm expects the 10-year yield to fall to 3.55% next December.  At Deutsche Bank, which forecasts no Fed cuts in 2025, the team led by Matthew Raskin is looking for the 10-year yield to rise to 4.65% on strong growth, low employment and stickier inflation. — Carter Johnson

All change at the Fed

Another thing for traders to account for is that next week marks the annual round of musical chairs at the Fed as new regional presidents rotate onto its interest-rate-setting panel. The Federal Open Market Committee includes some of the presidents from 11 of the regional Fed banks, in addition to the seven Fed governors and the head of the New York Fed. In 2025, Susan Collins of Boston, Alberto Musalem of St. Louis, Jeff Schmid of Kansas City and Austan Goolsbee of Chicago will join the committee, just as renewed inflation concerns inject a fresh layer of complexity into decision making. Bloomberg Economics predicts the panel will split more in the coming year. Its analysis "suggests increased dispersion among FOMC voters next year, with views dispersed toward the ends of the spectrum, with less clustering around the center," said economists led by Anna Wong. — Amara Omeokwe

Looking up

Yesterday we noted how 2024 was a bad year for those paid to trade on when or whether mergers and acquisitions will be completed. The merger-arbitrage strategy gained 3.3% this year through November, the worst among more than 30 hedge-fund styles tracked by Bloomberg. But such speculators are more upbeat about 2025. They're hoping  Trump's pro-business approach and the prospect of new leadership at the Federal Trade Commission and the Justice Department will pave the way for more big-ticket M&A deals. "The opportunity set is potentially epic: It's going to be a lot of deal flow," after the last four years of potential deals not coming to fruition, said Drew Figdor, a portfolio manager at AlTi Tiedemann Global. "Now you have the opposite," with Trump poised to enter the White House and new officials set to handle antitrust matters, he said. — Yiqin Shen

Word from Wall Street "I'd argue the risk of the Fed cutting more than twice in 2025 is quite high."   Neil Dutta Head of US economic research at Renaissance Macro

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