Why the Fed is about to become a ‘sideshow’

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President Donald Trump wants the Federal Reserve to keep cutting interest rates. That looks unlikely — at least for now.

Investors agree that the Fed, which announces its latest interest rate decision on Wednesday, will choose to sit tight for the time being.

From strategists at Bank of America: “The Fed’s communication since the October meeting has been crystal clear: policy is appropriate and there would need to be a ‘material reassessment’ of the outlook to adjust rates.” A solid jobs report for November all but ensured that policy will remain unchanged.

Things get much more interesting when looking ahead to 2020.

Wall Street’s view: Goldman Sachs expects rates to stay on hold next year, with Fed members signaling one hike in 2021 and one in 2022. But not everyone agrees. UBS, for example, thinks that the Fed will cut interest rates in March, April and June.

“We still expect three cuts in the first half of 2020, because we see the US economy slowing meaningfully early next year,” chief US economist Seth Carpenter said in a recent note to clients.

Much of this ambiguity is intentional. Fed Chair Jerome Powell is clearly keen to stay flexible, giving the central bank room to respond to new developments on trade or weaker-than-expected economic growth.

But that doesn’t give markets much to work with in the meantime.

“This will essentially make the Fed a sideshow for the next few months as attention turns to policy risks around the trade conflict and the upcoming presidential election,” said Joseph Brusuelas, chief economist at tax advisory and consulting firm RSM.

Saudi Aramco shares pop 10% after biggest IPO ever

Saudi Aramco shares increased 10% when they began trading on Wednesday — capping a stock market debut that shattered records but failed to achieve the $2 trillion valuation sought by Crown Prince Mohammed bin Salman.

Remember: Saudi Arabia’s giant state-owned oil monopoly pulled off the biggest IPO in history last week. It raised $25.6 billion by selling 1.5% of the company. That exceeded even Alibaba’s 2014 market debut in New York.

Shares in Saudi Aramco shot up to 35.20 riyals ($9.39) on Wednesday, the maximum daily increase allowed by the exchange. That brought the company’s valuation to $1.88 trillion, up from $1.7 trillion. It’s by far the most valuable publicly traded company in the world.

But the real test for Aramco is where shares go in the weeks and months to come.

International interest in the company looks muted, with the Saudi government relying heavily on domestic support for shares.

See here: Samba Capital, which managed the IPO, said Tuesday that 97% of retail investors who received shares were from the country. More than 75% of shares sold to institutional investors went to Saudi companies, funds and government institutions.

Such limited global interest could hurt Saudi Arabia’s ability to list additional shares on a foreign exchange.

The UK election could send the pound crashing

Investors are betting that Prime Minister Boris Johnson will sweep to victory in Thursday’s election. If he doesn’t, the pound and UK stocks are poised to plunge.

The pound has strengthened about 2% since the general election was called in late October, and on Wednesday was trading near a seven-month high around $1.31, and way above a low of $1.20 hit in August. The FTSE 250 index of midsize British companies has gained roughly 3%.

Post-election predictions: Should Johnson’s Conservatives win, UK markets are expected to hold onto recent gains, though they may not rally much beyond that. But an unexpectedly strong showing from Labour could result in a shock.

The odds of the opposition party winning an outright majority look small. But recent polling suggests there’s still the chance of a hung parliament, which would open the door to Labour forming a minority government with the support of a smaller party.

Here’s more on the outlook for investors, as well as a rundown of where Johnson and Jeremy Corbyn stand on issues affecting business and the economy.

Up next

American Eagle Outfitters reports earnings before US markets open. Lululemon and Tailored Brands follow after the close.

Also today:

• US inflation data arrives at 8:30 a.m. ET.
• The Federal Reserve’s latest interest rate decision hits at 2 p.m. ET.

Coming tomorrow: The United Kingdom heads to the polls for its third general election in four years — with lots on the line for the pound.