Markets are responding to a 73.8% probability of a December Fed rate cut and Trump's upcoming presidency. While job openings exceeded expectations at 7.74M, gold prices remain range-bound amid global political tensions. Oil stabilized after a 3% surge on OPEC+ cut speculations. But what's China's next move in this complex economic puzzle?
73% Chance, 100% Uncertainty: Trump’s Agenda & Fed’s Balancing Act
Global markets continue to fluctuate amidst bets on the Federal Reserve’s path toward rate cuts and expectations regarding the potential impacts of policies under President-elect Donald Trump.
Since the start of the week, activity in the U.S. bond market has signaled a decline in the so-called “Trump trade,” fueled by speculation that Trump’s plans for tax cuts and higher tariffs could reignite inflation and reduce the Fed’s extent for rate cuts.
According to JPMorgan Chase & Co.'s weekly survey on Tuesday, clients' long positions in U.S. Treasury bonds surged to their highest level in a year, while net long positions reached their highest point since November 4.
Statements from a handful of Fed officials since the beginning of the week supporting an additional rate cut at the December 17-18 policy meeting have boosted trading volumes against U.S. Treasury yields and the dollar.
On Monday, Fed Governor Christopher Waller said at a conference that he was inclined to lower borrowing costs at this month’s meeting. However, Waller also noted that data to be released before then could provide justification for holding rates steady.
While Waller expressed concerns about recent data showing inflation stalling above the 2% target, his colleague Adriana Kugler shared optimism about the trajectory of inflation and broader economic conditions.
Meanwhile, Atlanta Fed President Raphael Bostic and Chicago Fed President Austan Goolsbee refrained from commenting directly on this month’s rate decision but emphasized their belief that the Fed should continue to lower rates in the coming period.
It is clear that Fed officials wish to stay on the path of policy easing, but their remarks highlight that decisions will remain data-dependent, maintaining uncertainty in market expectations.
According to swap market data, a quarter-point rate cut this month is now priced in with a 73.8% probability, up from 61.6% earlier in the week. However, looking ahead to next year, expectations remain somewhat uncertain. Traders see the Fed potentially pausing rate cuts early next year, with a projected reduction of 36 basis points over three meetings through March.
For expectations to gain further clarity, Trump’s inauguration and policy announcements will be pivotal. Economists continue to emphasize the uncertainties surrounding monetary policy, including the neutral rate. Consequently, in addition to this month’s rate decision, the Fed’s updated rate projections will be a key focus to gain insights into the path forward.
On the other hand, the October JOLTS Job Openings report, released on Tuesday, showed a larger-than-expected increase. Available positions rose to 7.74 million from a revised reading of 7.37 million in September, exceeding economists' median forecast of 7.48 million.
The report from the US Bureau of Labor Statistics indicated that layoffs decreased in October, suggesting stabilization in labor demand. Besides, quits reached their highest level since May, reflecting greater confidence among workers in finding new jobs.
The better-than-expected job openings report is significant for Fed officials aiming to prevent further weakening in the labor market. This could justify the Fed's reluctance to rush into cutting interest rates.
Meanwhile, sectoral data following Trump’s election victory pointed to increased optimism among American companies, driven by expectations of more business-friendly policies and reduced regulatory burdens.
According to data released on Monday, the Institute for Supply Management’s factory gauge rose to its highest level since March. While both manufacturing activity and factory employment measures remained in contraction territory, they showed improvement.
The manufacturing employment index climbed 3.7 points in November to 48.1, the highest level in over two years. Another data point revealed declining material costs for manufacturers, while orders received have increased in recent weeks.
In conclusion, recent data suggests that the US economy remains resilient, giving the Fed time to assess the potential impact of the new president's policies on the economy. Federal Reserve Chair Jerome Powell is expected to shed light on the Fed's path forward during his speech early Thursday.
Traders, however, will await Friday's critical payroll report before clarifying their expectations. A disappointing figure that stirs expectations for further rate cuts by the Fed could deepen the US dollar’s recent weakness. Conversely, a stronger-than-expected report might help the dollar recover its recent losses.
Gold’s Tug of War: Rate Cuts, Political Chaos, and Global Tensions
Gold prices continue to fluctuate within a narrow range amid Fed expectations, "Trump trade", and geopolitical developments.
As traders increase their bets on a potential Fed rate cut in December, the US dollar has weakened, reducing the opportunity cost of holding gold and limiting the downside for bullion prices. Yet, on Friday, payroll growth figures are anticipated, which could provide further insights into the Fed's policy direction.
Meanwhile, political turmoil in South Korea and France is offering limited support for safe-haven demand. South Korean President Yoon Suk Yeol unexpectedly declared martial law on Tuesday night but rescinded the decree just a few hours later. In France, far-right leader Marine Le Pen is reportedly attempting to join forces with a left-wing coalition to overthrow the government.
Despite some easing of tensions in the Middle East, the ongoing conflict between Ukraine and Russia, along with geopolitical developments from other parts of the world, may continue to sustain safe-haven demand. However, it's worth noting that if US economic data justifies the Fed’s reluctance to rush into rate cuts, the dollar could strengthen further, potentially putting pressure on gold prices.
Barrels of Uncertainty: OPEC+ Cuts, Sanctions, and China’s Influence
Oil prices stabilized after surging more than 3% during Tuesday’s session, driven by speculation that the OPEC+ group will decide to extend its production cuts for another three months. Another development that triggered the rise was the U.S. imposing additional sanctions on Iranian oil.
Economists at Bank of America suggest that the future of oil prices will largely hinge on sanctions imposed on Iran, Venezuela, and OPEC. If sanctions on Iran and Venezuela lead to reduced production, oil prices could climb towards $80 per barrel in the coming period, contrary to earlier forecasts of $60 per barrel.
Meanwhile, the outlook for demand remains a critical factor for prices. China’s top leaders are set to meet next week to discuss economic targets and stimulus plans for 2025. Optimism surrounding Chinese demand could provide support for oil prices, whereas a lack of positive developments may continue to act as a key limiting factor for upward movements.
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