The dollar is consolidating near a seven-week high against its major counterparts as yield differentials normalise and safe-haven demand fades. Treasury yields are moving in opposing directions across the curve, with the two-year slipping lower even as the ten-year inches higher, and North American equity futures are positioned for a modest recovery at the open. Currency markets are seeing mixed price action after Chinese authorities disappointed investors with a smaller-than-expected stimulus announcement: the Canadian dollar and other risk-sensitive units are grinding lower, while the pound, euro, and Japanese yen are all sitting on small gains after coming under sustained selling pressure for much of the last week.
Federal Reserve officials doubled down on their gradualist messaging in yesterday’s appearances, helping ratify a pullback in market-implied odds on jumbo-sized rate cuts at upcoming meetings. Governor Adriana Kugler called for a “balanced approach,” saying that “While I believe the focus should remain on continuing to bring inflation down to 2 percent,” she also supports “shifting attention to the maximum-employment side of the FOMC’s (Federal Open Market Committee) dual mandate”. New York President John Williams noted September’s “very good” jobs report in an interview with the Financial Times, observing “The current stance of monetary policy is really well positioned to both hopefully keep maintaining the strength we have in the economy and the labour market, but also continuing to see that inflation comes back to 2 percent”.
The gap between Fed officials and markets has largely disappeared. Futures are now priced for a total of 49 basis points in easing by year end – closely matching the two moves pencilled in by policymakers in September’s Summary of Economic Predictions (SEP) – and Williams appeared content with that, saying: “Last month’s outsized rate cut shouldn’t be considered “as the rule of how we act in the future,” and “If you look at the SEP projections that capture the totality of the views, it’s a very good base case”.
Economists are all-in on the US exceptionalism story, with growth expected to roundly trounce advanced-economy counterparts by year end. With real income gains seen supporting increased consumer spending, bolstering business investment and keeping the labour market aloft in a virtuous cycle, forecasts are steadily ratcheting higher and helping tilt interest rate differentials back in the dollar’s favour.
Volatility expectations are climbing as the US election approaches. With major economic policy changes potentially on the menu once the new president is chosen, investors are bracing for an unusual period of uncertainty after November’s vote, and hedging costs are beginning to rise. We suspect this will continue, particularly if Donald Trump manages to narrow the polling gap with Kamala Harris in coming weeks, and think that the greenback could gain added momentum as market participants steer toward what is still seen as a rock in the sea of troubles – even as it is also where the troubles emanate from.
Oil prices are paring their gains after jumping during yesterday’s session, with both global benchmarks down almost 2 percent from the highs. Market participants remain wary of risks related to Israel’s nearly-inevitable reprisal against Iran for last week’s missile attack, but with broader demand and supply balances keeping the longer-term outlook under pressure, hedging flows are showing up in options prices, and not in spot markets.
The renminbi – and China-sensitive currencies like the Australian dollar and Korean won – are back on the defensive after a lack of clarity on Beijing’s fiscal stimulus plans caused a spectacular rally in onshore stock markets to run out of steam. In a widely-anticipated press conference, Chairman of the National Development and Reform Commission Zheng Shanjie said the government plans to accelerate provincial borrowing and bring forward investment originally scheduled for 2025, saying “all sides should keep making efforts more forcefully” to stabilise the economy. “The international market is volatile, global trade protectionism has intensified, and uncertain and unstable factors have increased. These will have an adverse impact on my country through trade, investment, finance and other channels,” he said, but “We are fully confident in achieving the annual economic and social development targets”.
Two weeks ago, Chinese authorities launched the biggest stimulus effort since the pandemic in a series of carefully-choreographed daily announcements, lowering borrowing rates, reducing bank reserve ratios, and providing liquidity facilities for share purchases. This sent stock prices soaring, with the CSI 300 index – a capitalisation-weighted index containing most of China’s top listed companies – up more than 31 percent this month. But with property prices declining, household credit demand almost non-existent, and consumer sentiment languishing near historic lows, it is clear that more will be needed to pull the real economy out of its malaise. More fiscal spending might staunch the bleeding, but structural reforms designed to lift the household share of gross domestic product will likely prove necessary in the long run.
