By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Sentiment steadied on Friday amid a dovish Fed repricing, as a holiday-shortened week now awaits Stateside, and focus in the UK turns to Wednesday’s Budget.
WHERE WE STAND – I wonder if we may have just found the strike price for the ‘Fed put’.
Perhaps I’m ‘over-egging the pudding’ a bit on that front, but surprisingly explicit dovish remarks from the second most influential man on the FOMC at the end of a brutal week for risk assets certainly gets you thinking.
I refer, of course, to comments from NY Fed President Williams on Friday, who confirmed that he still sees room for a ‘near-term’ rate cut, amid ‘increased’ downside risks to the employment side of the dual mandate. Now, some may say that those comments are in keeping with Williams’ longstanding views, which they are, however my gut feeling is that Williams wouldn’t put out comments as overt as that without at least getting a nod from Chair Powell first.
Markets, clearly, took the dovish comments to heart, with the USD OIS curve now discounting around a 75% chance of a 25bp cut in December, up from around 35% after the September jobs report was released on Thursday. The thinking here is that Williams is a proxy for Powell, and if Powell were in favour of a cut next month, he’d likely be able to convince other ‘undecided’ FOMC members such as Cook, Goolsbee & Collins with him, in order to obtain a narrow majority in favour of such a move.
Now, I jest a little about the ‘Fed put’ being in play already, as I’d be shocked if a 5% slide in the S&P worried policymakers (or anyone else, actually) too much. However, there is at least a small signal here that policymakers are cognisant of recent market volatility, especially in light of the potential negative wealth effect that a prolonged drawdown could trigger, something more important than ever given the ‘K-shaped’ nature of the US economy.
Anyway, those dovish comments combined with late-day news that the Trump Admin are reportedly considering allowing Nvidia to sell H200 chips to China saw sentiment steady as the week drew to a close, with the S&P and Nasdaq adding about 1% apiece.
Those gains saw both benchmarks reclaim, and close above, their respective 100-day moving averages. That may calm some nerves among the more technically-minded traders out there, while the fundamental bull case remains a solid one too, amid the resilient underlying economy, robust earnings growth, a calmer tone on trade, and the looser monetary backdrop (regardless of whether/not a Dec cut happens). I remain minded to buy equity dips, albeit while recognising that liquidity will likely be much thinner than usual in the holiday-shortened week ahead.
Elsewhere, Friday proved to be another relatively choppy and indecisive day in the G10 FX complex, albeit one which saw the dollar continuing to trade in relatively firm fashion, allowing the DXY to notch its first weekly close north of the 100 mark since all the way back in May. The aforementioned dovish repricing of Fed policy expectations seemed to pose little by way of a headwind, and I remain bullish on the buck here, especially against the quid, where the bear case now needs little-to-no explanation at all.
I will note, however, that we had 3 UK data releases on Friday, and all 3 were worse than expected – retail sales fell in October for the first time since May, the YTD deficit in October stood at its second highest on record after 2020, and November’s ‘flash’ services PMI print fell to a 7-month low. What a cracking backdrop against which Chancellor Reeves will deliver the Budget this week…not!! Frankly, I’m running out of words to describe how stuffed the UK economy is at this point.
Back to markets closing above key levels, though, and while trade has been turbulent over the last few days, gold notched another close above $4,000/oz. That level is, quite clearly, a huge ‘line in the sand’ for bullion, above which one would be inclined to bet on further upside, especially with essentially price-insensitive demand from reserve allocators remaining very healthy indeed.
LOOK AHEAD – A holiday-shortened week lies ahead, with the US out for Thanksgiving on Thurs & Fri, and with trading conditions likely to be much thinner throughout as a result.
We do get a couple of key pieces of stateside data, though, with focus largely falling on September’s retail sales and PPI prints which, despite being very stale indeed, will nonetheless likely play a part in shaping expectations for the December FOMC meeting. Also from the US this week, we’re due to receive the latest consumer confidence and durable goods orders figures, along with the Fed’s ‘Beige Book’, and a chunky slate of Treasury supply.
Here in Blighty, focus will fall on Wednesday’s Budget, where Chancellor Reeves is set to announce a fiscal tightening to the tune of as much as £35bln, comprised almost entirely of tax increases. With an increase in income tax rates seemingly having been ruled out, a ‘smorgasbord’ approach is instead likely to be taken, including the freezing of income tax thresholds, changes to council taxes (aka a ‘Mansion Tax’), and changes to salary sacrifice schemes. Furthermore, other likely measures include a possible new tax on EVs, changes to the banking levy, gambling taxes, as well as possibly changes to the ISA system. None of this, to be clear, will be particularly growth-enhancing.
Elsewhere, the RBNZ will cut rates by 25bp on Wednesday morning, while the latest German economic sentiment figures, and minutes from the October ECB meeting, highlight the eurozone docket.