By Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Stocks advanced once more yesterday, as the risk rally resumed, while Treasuries softened a little, and the dollar gained some modest ground. Today, ADP employment & ISM services are in focus.
WHERE WE STAND – All seemed to be right with the world again yesterday, at least as far as financial markets were concerned, with sentiment notable steadier after wobbling on Monday.
Before getting to that, though, as we’re nearing the end of the year, I thought I’d take a look at how Treasury Secretary Bessent’s three stated market priorities had been panning out. Late last year, upon nomination to the role, Bessent noted his preference to see a weaker USD, lower Treasury yields, and lower oil prices.
As it turns out, following Scotty B would’ve worked out rather well, with the DXY -9%, 10-year yield -50bp, and WTI -25% since the start of Trump’s second term in office. Let’s see if Bessent peers into his crystal ball and gives us some market calls for the year ahead; which, actually, reminds me, that I need to get cracking on my 2026 outlook too.
Anyway, back to the ‘here & now’, where as noted markets by and large struck a much steadier tone as we moved through the day.
Still, it does feel as if most participants are in ‘wait and see’ mode for the time being, if they have even returned to their desks at all post-Thanksgiving. For instance, implied vols across G10 are well within the bottom 10th %ile of the 12-month range, while the US 2s10s spread has been in a range of just 20bp over the last six months. The only other times we’ve seen such a tight range since the turn of the century were in 2007, and in 2019. Let’s hope that this calm isn’t a ‘harbinger of doom’ as it was in those two years, and instead is more reflective of the market simply biding its time until a fresh catalyst comes along.
In the meantime, markets did what they tend to do on such days, and took the ‘path of least resistance’ for the most part.
For stocks, that path continues to point to the upside, with the bull case remaining a very solid one indeed, and with participants seeking to ride the coattails of the rally higher, especially amid the increased influence of FOMO/FOMU flows as we move into the end of the year. Gains were solid across the board, albeit led by the tech sector, with the Nasdaq 100 rallying to its best levels since the middle of last month.
Elsewhere, it was another day of softness for DM Govvies which, while that move does fit the broader risk tone, I’m still inclined to put down to longs being unwound as opposed to anything specific to what we saw yesterday, even if another chunky slate of corporate issuance did probably exert some pressure as well. The big question now is whether these levels – 4.10% in the benchmark 10-year Treasury, and 4.75% in the benchmark 30-year – again prove enticing enough for dip buyers to enter the fray, as they have done recently.
I’d wager that those buyers will indeed be tempted, though equally that most will likely want to hold off until the event risk of next week’s FOMC decision has passed us by.
Meanwhile, the dollar also rebounded just a touch, though moves in the FX space were on the whole modest in nature, as they have been for so long now. Still, it was interesting that the EUR failed to catch a significant bid on the back of modestly hotter than expected November inflation data, with a third straight monthly rise in services prices in particular strengthening the case for the ECB’s easing cycle now being done & dusted. That lack of reaction, in turn, supports a theme that I’ve now been touting for a while, that it is relative growth, not relative rate, divergences which will likely be the main driver of the FX space moving forwards, further helping the bull case for the greenback.
LOOK AHEAD – A busy-ish data docket up ahead today, featuring a couple of notable US releases.
While services PMI figures are due from pretty much everywhere, it will be last month’s US ISM survey that steals the lion’s share of participants’ attention, not least after the disappointing ISM manufacturing read on Monday. In any case, the services index is set to have slipped a touch to 52.0 last month, down from 52.4 in October, though it’s tough to see any print materially altering the policy outlook, or deterring the FOMC from another 25bp cut next week.
Meanwhile, we also get the latest US ADP employment report today, set to point to a very modest +5k private sector jobs having been added last month, again evidencing the ‘no hire, no fire’ nature of the US labour market, and supporting the case for another ‘risk management’ cut this time next week.
Besides that, US retail earnings continue with a report from Macy’s before the open, while ECB President Lagarde is due to speak a couple of times this afternoon, likely reiterating her view that policy remains in a ‘good place’.