22 November 2024 - Global markets face heightened volatility as Trump's anticipated policies and Federal Reserve's rate decisions shape investor sentiment. While the U.S. economy shows resilience with strong labor data, geopolitical tensions have driven gold above $2,700 and oil past $70. Meanwhile, Japan grapples with inflation pressures, considering its third-rate hike!
Fed Rate Cuts and Trump's Policies: Uncertainty Fuels Market Volatility
As discussions over the Federal Reserve's pace of interest rate cuts continue, "Trump trades" are weighing on expectations and sentiment, causing fluctuations in global markets. Strategists are revising their currency forecasts, hedge funds are ramping up their forex positions, and bets on increased volatility in the $7.5 trillion daily forex market are on the rise.
Economists anticipate greater volatility in currencies most exposed to Donald Trump's policies, particularly tariffs. This volatility is expected to be concentrated in movements of the yuan, euro, Australian dollar, and yen against the US dollar.
The timing and speed of implementing Trump’s policies remain uncertain. However, market observers argue that unpredictability will be a defining feature of his tenure, with 2025 shaping up to be a year of volatility and uncertainty.
During Trump’s previous presidency, policies like trade tariffs took a relatively long time to implement, leading to more prolonged and moderate volatility than initially expected. This time, however, the circumstances are different. The Republican majority in the House of Representatives and the Senate could lead to faster and more aggressive implementation of policies.
Another layer of uncertainty stems from how countries affected by Trump’s policies will respond and what impact these countermeasures might have on markets. Given the overall picture, this situation is increasing volatility in global markets, triggering a flight to quality, and boosting demand for the US dollar.
On the other hand, Trump’s protectionist policies are expected to drive up domestic inflation and widen the policy divergence between the Fed and its peers. The Fed recently eased rates by half a percentage point in September and by a quarter-point this month, aiming to prevent excessive cooling in labor market conditions as US inflation approaches target levels. However, the combination of Trump’s inflationary policies and resilient US economic data has clouded the Fed’s policy outlook.
While Fed officials’ statements generally reflect a cautious stance, some remain optimistic. Chicago Fed President Austan Goolsbee struck an optimistic tone in a speech on Thursday, highlighting that inflation has dropped significantly over the past year and a half while the labor market has cooled near full employment. Goolsbee remarked that the Federal Reserve's dual mandate—price stability and maximum employment—was nearing its desired balance, suggesting this might necessitate rate cuts in the near future.
On the same day, Boston Fed President Susan Collins expressed support for additional monetary policy easing. Collins noted that the economy is generally in a strong position and that inflation is on track to return to the Fed's target rate. While describing the labor market as healthy, she emphasized that further slowing in hiring would be undesirable, signaling her potential support for more rate cuts to prevent excessive cooling in the job market.
Some Fed officials are not concerned about the recent plateau in inflation data, viewing the volatility as normal, but some do not share the same view. Fed Governor Michelle Bowman, in remarks on Wednesday, expressed reservations about further rate cuts, citing the slowdown in inflation's progress.
Bowman stressed the importance of closely monitoring labor market developments and advocated a more cautious approach to assessing how far the Fed is from achieving its goals. Her comments supported expectations that the Fed might pause rate cuts if inflation progress stalls while the labor market remains strong.
Jobless claims data released on Thursday supported the outlook of a strong labor market. Initial claims for unemployment benefits fell unexpectedly to 213,000 for the week ending November 15, the lowest level since April. This figure, a 6,000 drop, came in below economists' median forecast of 220,000, underscoring the resilience of the labor market.
Meanwhile, continuing claims—a measure of ongoing unemployment benefit recipients—rose to a three-year high of 1.91 million. However, this increase partly reflected a spike in Washington state due to the Boeing Co. worker strike.
Overall, the latest U.S. economic data suggest the economy remains on solid footing, fueling expectations for a slower pace of Fed rate cuts. Swap markets now price a 25-basis-point rate cut at the December 18 meeting with a 55.9% probability, down from 65.3% earlier in the week. The projected total easing by the end of 2025 has dropped to 70 basis points, suggesting a target range of 3.75%-4.00%, compared to the current 4.5%-4.75%.
After a relatively quiet week on the economic calendar, traders are bracing for volatility in the week ahead. Key events include U.S. GDP data and the Fed's preferred inflation gauge for October, both set to be released on Wednesday, which could provide further insights into the Fed's policy trajectory.
Gold Rises Despite High U.S. Treasury Yields and a Strong Dollar
Gold has risen throughout the week, currently trading above the $2,700 level, as escalating tensions between Russia and Ukraine have supported safe-haven flows, despite high U.S. Treasury yields and a strong dollar.
Traders were also influenced by comments from Federal Reserve officials expressing confidence in inflation progressing toward the target rate and emphasizing the undesirability of further cooling in job gains. Projections that the Fed will continue cutting rates next year, even at a slower pace, are positive for non-yielding gold.
However, market uncertainty continues to escalate before the new U.S. President, Donald Trump, takes office. Expectations that Trump’s policies might constrain the Fed's ability to cut rates are keeping U.S. Treasury yields elevated, raising the opportunity cost of holding gold. Additionally, a stronger dollar is making the yellow metal more expensive for many buyers, which could weigh on the recovery of precious metals in the near term.
Oil Surges Amid Russia-Ukraine Escalation, Topping $70 Per Barrel
Crude oil is on track for its largest weekly gain since the beginning of October, driven by rising tensions between Russia and Ukraine. West Texas Intermediate (WTI) crude, which fell nearly 5% last week, has surged more than 5% this week, climbing above $70 per barrel.
The long-running Russia-Ukraine conflict, ongoing since 2022, has flared up again. Ukraine’s use of long-range weapons supplied by Western allies prompted a ballistic missile response from Russia. Additionally, Russia’s decision to amend its nuclear doctrine has further heightened geopolitical concerns.
While the oil market remains volatile amid developments in the Middle East, the uncertainty surrounding how far the Russia-Ukraine conflict might escalate is causing additional fluctuations. Some market analysts suggest the recent clashes have added a $3 to $4 risk premium per barrel, which could increase if the conflict continues.
Nevertheless, the oil market faces headwinds from weak demand in China and the potential for a significant supply surplus in 2025, both of which could act as a cap on upward price movements.
Japan’s Inflation Figures Keep Rate Hike Speculation Alive
A report released earlier today revealed that Japan’s core inflation indicator has eased slightly but remains above the central bank’s target. Consumer prices excluding fresh food rose 2.3% in October compared to a year earlier, down from 2.4% in September but exceeding the consensus forecast of 2.2%. Besides, the so-called core-core indicator, which excludes fresh food and energy costs, increased by 2.3%, up from 2.1%.
On Thursday, Bank of Japan (BoJ) Governor Kazuo Ueda avoided giving clear signals about the timing of the next rate hike but provided the clearest indication yet that this possibility will be discussed at the upcoming December 19 meeting. More than 80% of BoJ watchers see a rate hike as likely in December or January. These expectations are bolstered by both the inflation figures and the yen’s deepening decline following Trump’s election victory.
Meanwhile, Japanese Prime Minister Shigeru Ishiba is expected to announce a $140 billion economic stimulus package today, addressing challenges ranging from inflation to wage growth. This initiative follows his campaign promises to alleviate financial struggles for low-income households. Such a stimulus could support consumption and economic growth in Japan, potentially strengthening the yen against the dollar to some extent.
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