A look at the coming day in US and global markets by Mike Dolan
With another monthly round of persistent inflation and uncertainty over fiscal, tariff and immigration policy looming, the Federal Reserve is becoming more cautious about the scope for further policy easing.
Fed chief Jerome Powell didn’t reveal much in a closely watched speech Thursday, but he made clear that the central bank still sees a robust economy and has plenty of new information to take into account in deciding how much further it should lower rates. interest rates.
“The economy is not sending any signal that we should be in a hurry to lower rates,” Powell said at a Dallas Federal Reserve event.
With just 18 months to go until the end of his last term as head of the Federal Reserve, Powell seemed willing to dodge questions about the policy decisions of Donald Trump’s incoming administration, reinforced as he was on Thursday by the confirmation of a Republican victory in the Congress.
“We can do the arithmetic,” Powell said when asked about possible increases in import tariffs and immigration restrictions, adding that “this is getting me into political issues that I really want to stay as far away from as possible.”
But in addition to a more positive-than-expected producer price report for October and another drop in weekly jobless claims, interest rate markets continued to reduce expectations that the Federal Reserve will ease its policies in the future. October retail and industrial numbers top Friday’s agenda.
Futures now see only a 60% chance that the Federal Reserve will cut rates again next month, and less than three quarter-point cuts are already fully priced in over the next year. Some economists now think Fed rates may not drop below 4% again this cycle.
Both the 12-month Treasury bill rate and the two-year note yield are now hovering just under 4.4%, with the 10-year benchmark just off five-month highs of around 4.45%.
And two-year market inflation expectations are stabilizing at around 2.5%, well above the Federal Reserve’s 2% target. And as cash rates remain elevated, money market fund assets continue to rise: Assets under management rose more than $100 billion over the past week to another record high of $6.67 trillion.
Wall Street stocks halted their immediate post-election rally this week and the dollar also saw its first daily decline on Friday since the results were revealed more than a week ago.
Attention focused on the state of other major economies, with nerves frayed by the threat of a global trade war.
The latest check on China’s economic health showed a mix of weak industrial readings and upbeat retail growth over the past month. But widespread pessimism about potential U.S. tariff increases, disappointment over recent stimulus details and continued real estate concerns sent Chinese stocks tumbling again.
China’s annual house price deflation deepened in October to 5.9% (its biggest drop since 2015), although the monthly decline moderated slightly to a 0.5% drop. Real estate investment in China also fell at a faster pace of 10.3% in the first 10 months of 2024, compared to 10.1% between January and September.
The CSI300 stock index lost almost 2% on Friday, completing its worst week since July, led by falls in the real estate sector. Hong Kong’s Hang Seng was only marginally in the red, but posted a sixth straight day of declines.
However, the foreign yuan recovered against the falling dollar, as the 10-year yield premium on US Treasuries over their Chinese equivalents stabilized at its widest level since May.
The dollar also fell against the Japanese yen, as traders fear that excessive weakness in the yen could lead to Bank of Japan intervention and the latest Japanese GDP reading above forecasts. With a key BoJ news conference scheduled for Monday, Finance Minister Katsunobu Kato said authorities would take appropriate measures against sharp exchange rate movements.
However, the gloomier outlook for global demand has sent crude oil prices falling again despite this week’s drop in US inventories.
Britain added to that cloud, showing its economy contracted unexpectedly in September and growth slowed to a crawl during the third quarter, an early setback for Finance Minister Rachel Reeves’ ambitions to revive growth. .
In the euro zone, the German economy remains the big concern. Although the European Commission forecast a relatively rapid expansion of 0.8% for the euro zone this year, it cut its German estimate to show a contraction of 0.1%.
European Central Bank board member Isabel Schnabel said the ECB should continue to use interest rates as its main policy tool and that extraordinary measures such as bond purchases or far-reaching “forward guidance” should be used only in moderation.
In company news, there was a 6% rally in Walt Disney after the entertainment giant reported higher quarterly earnings and strong guidance.
Elsewhere, shares of automaker Tesla closed down 5.8% and Rivian Automotive fell 14.3% on Thursday after Reuters reported that Trump’s transition team is planning to eliminate the tax credit. $7,500 consumer allowance for the purchase of electric vehicles as part of broader tax reform legislation.
In Europe on Friday, vaccine makers came under pressure after Trump said he had selected Robert F. Kennedy Jr., an environmental activist who has spread misinformation about vaccines, to lead the Department of Health and Human Services.
Overall, Wall Street stock futures were in the red before the bell on Friday. Popular “Trump trades” such as Bitcoin were firmer again, but a far cry from this week’s highs and the top cryptocurrency was back below the $90,000 level on Friday.
Key developments that should provide more direction to US markets later on Friday:
* October US retail sales, industrial production, import/export prices, New York Fed November manufacturing survey, September business/retail inventories
* New York Federal Reserve President John Williams and Boston Federal Reserve Head Susan Collins speak; The chief economist of the European Central Bank, Philip Lane, speaks
