Swap traders reduced bets on the Federal Reserve's easing path after a series of mixed data this week. The market is preparing for another rate cut from the Fed, but next week's move is more likely to be characterized as hawkish.
This week, the Dow Jones Industrial Average fell 1.82%, the S&P 500 fell 0.64%, ending its three-week winning streak, and the Nasdaq rose 0.34%. The 10-year Treasury yield rose more than 7 basis points to 4.40%; the US dollar rose above 107 on Friday, setting a new two-week high, and rose nearly 1% for the week; the Japanese yen fell to 154, falling more than 2% for the week; Bitcoin rose for seven consecutive weeks, the longest consecutive rise since 2021.
In terms of commodities, U.S. oil futures rose by more than 6.08% this week, and Brent oil futures rose by about 4.74% this week. The United States is expected to strengthen sanctions on Iran and Russia. Spot gold fell below the $2,650 mark, but rose throughout the week, affected by the Federal Reserve's expectation of a rate cut next week. However, the World Gold Council said that gold prices will rise more slowly in 2025.
The last important monetary policy week of 2024 will capture investors’ attention. By the close of next Friday, at least 22 central banks, accounting for two-fifths of the global economy, will set borrowing costs, and the results are likely to highlight that the momentum for easing now looks increasingly unbalanced as policymakers weigh different risks in the year ahead.
Among them, the market focuses on the interest rate decisions of the Federal Reserve, the Bank of England and the Bank of Japan next week. It is expected that the Federal Reserve will cut interest rates by 25 basis points, while the Bank of England and the Bank of Japan will remain on hold. In addition, the United States will release important data such as the November PCE price index, retail data, and the final value of the third quarter real GDP annualized quarter-on-quarter. The following are the key points that the market will focus on in the new week (all in Beijing time):
Central Bank Dynamics: The Federal Reserve may stage a "hawkish rate cut", and gold may no longer be able to continue to rise
Federal Reserve: There is little doubt that the interest rate cut will take place in December
At 03:00 on Thursday, the Federal Reserve will announce its interest rate decision and a summary of its economic forecasts;
At 03:30 on Thursday, Federal Reserve Chairman Powell held a monetary policy press conference;
Traders now see a 97% chance of a 25 basis point rate cut at the Fed’s Dec. 17-18 meeting. But stronger November data raises the risk that the Fed will pause in early 2025. Powell’s post-meeting speech and updated economic forecasts will be crucial.
Goldman Sachs believes that the Fed will undoubtedly cut interest rates in December, and then cut interest rates by 25 basis points in January and March of 2025; and then cut interest rates only in the June meeting and September meeting. However, there are still some variables, because more and more Fed officials have indicated that the FOMC may slow down the pace of interest rate cuts as soon as possible, so there is a risk of pausing interest rate cuts at the January meeting.
Some institutions believe that it cannot be ruled out that the Fed will remain on hold next week. Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities in New York, pointed out, "Given that the economy may perform well, I think the Fed may decide to remain on hold and just wait and evaluate to ensure that inflation expectations do not re-accelerate... The last thing they want is to have to restart the rate hike cycle next year because they missed some signals."
Bloomberg economists believe that Trump has promised to take whirlwind actions, which will affect inflation and economic activity and complicate the FOMC's work. Because monetary policy works with a lag, policymakers aim to set policy at each meeting based on their best understanding of the economic situation in the next one or two years. When setting the federal funds rate in the next few meetings, policymakers will assess the chances of Trump's various proposals being implemented and balance their risks.
It is worth noting that the Federal Reserve’s expectation of a rate cut next week has been fully reflected in market prices. If there are any changes, it will overturn market expectations.
"The main question for the gold market right now is how quickly the Fed will ease its policy following Trump's victory in the U.S. presidential election," ING analysts said.
"Generally speaking, we think the U.S. economy will be stronger next year, which will reduce the scope for rate cuts and thus be less bullish for gold," said Carsten Menke, an analyst at Julius Baer.
“Gold has been on fire this year and we’re getting into the tail end of the year and there may be some liquidation in the final weeks, but I think it will be short-lived and I believe gold will continue to move significantly higher,” said Daniel Pavilonis, senior market strategist at RJO Futures.
Analyst David Song said that from a technical point of view, gold failed to break through and close above $2,730, breaking the recent trend of higher highs and lower lows. If the decline continues and breaks through the support zone of $2,660 to $2,630, it may trigger a deeper correction and there is a possibility of testing the monthly low of $2,614. Breaking through and closing at $2,590 means that $2,550 will become a short target, but if it can continue to hold the support of the November low of $2,537, it means that the decline in gold will not continue to expand and will continue to trade in a well-defined range. If you want to restart the upward momentum this week, you must break through and close above $2,730 to move towards the November high of $2,762. If you can further break through the resistance of the historical high of $2,790, it will open the door to a rise to $2,850.
Marc Chandler, managing director of Bannockburn Global Forex, said that hawkish expectations for the Fed to cut rates but by a smaller amount next year, and enough rhetoric to suggest support for speculation of a pause in rate cuts early next year, could push gold prices to retest $2,600. Adrian Day, president of Adrian Day Asset Management, said gold prices could fall next week due to optimism about the impact of Trump's presidency on the economy and the dollar. The news of the Fed's rate cut next week is already reflected in the market pricing, and we think Fed Chairman Powell may try to be slightly hawkish in his speech. But after next week, gold prices will be very bullish because all the factors that have bought gold in the past two years are still there, including central banks' concerns about the weaponization of the dollar and concerns about stagflation in the United States and Europe.
Other central banks: Bank of Japan, Bank of England expected to remain on hold
At 15:30 on Monday, European Central Bank President Lagarde will deliver a speech;
At 04:45 on Tuesday, Bank of Canada Governor Macklem delivered a speech;
On Thursday (exact time to be determined), the Bank of Japan will announce its interest rate decision;
At 14:30 on Thursday, Bank of Japan Governor Kazuo Ueda held a monetary policy press conference;
At 20:00 on Thursday, the Bank of England will announce its interest rate decision and meeting minutes;
As for the Bank of Japan, a Reuters poll released on Friday showed that most economists said the Bank of Japan will keep interest rates unchanged at 0.25% at its December policy meeting to assess overseas risks and wage prospects next year. According to multiple Japanese media reports, the Bank of Japan may keep interest rates unchanged at its meeting next week.
Bank of Japan policymakers believe that while Japan’s economy and prices are moving in line with expectations, they should keep a close eye on wage developments in Japan and the global economy, people familiar with the matter said. Policymakers are therefore unlikely to raise interest rates at their meeting next Wednesday and Thursday unless there is a risk of a sharp depreciation in the yen, pushing up import prices, the people said. The December meeting comes amid growing concerns that profitability for Japanese companies, especially exporters, will deteriorate as U.S. President-elect Donald Trump pledges to raise tariffs. Some Bank of Japan officials say it’s time to raise rates, but most believe the central bank shouldn’t rush, the people said.
Goldman Sachs believes that the Bank of Japan may have to wait for the "spring wage negotiations" to raise interest rates. Shusuke Yamada, head of Japanese currency and interest rate strategy at Bank of America in Tokyo, said, "If the Bank of Japan postpones the rate hike until March next year, the yen carry trade theme is likely to make a comeback. The yen may weaken again, falling to 155 or slightly below the 157 level reached in November."
As for the Bank of England, despite the weak data on Friday, the swap market does not expect the Bank of England to cut interest rates at next week's meeting. The market expects the central bank to keep interest rates unchanged at 4.75%, continuing to drive in the central bank's slow lane and cutting interest rates slower than the ECB and the Fed. The Bank of England has only cut interest rates twice in 2024, making the pound the only G10 currency that has not fallen against the US dollar in 2024.
The Bank of England is unlikely to act on an unexpected decline in U.K. output, Rob Wood and Elliott Jordan-Doak, analysts at Pantheon Macroeconomics, wrote in a note to clients. GDP fell for a second straight month in October amid weak consumer demand and month-end concerns about the government budget. But retail sales and other sectors will rebound in November, ensuring slight growth in the overall economy in the fourth quarter, according to Pantheon Macroeconomics' forecasts. As a result, Wood and Jordan-Doak said the Bank of England is likely to keep interest rates unchanged at its meeting next week and cut them next year.
Athanasios Vamvakidis, global head of G10 foreign exchange strategy at Bank of America, said the momentum for the pound's strength remains. The bank has become Wall Street's biggest pound bull, predicting that the pound will rise to its highest level against the euro since 2016 in 2025, and the pound is expected to rise 8% against the dollar.
Important data: The Fed's favorite inflation indicator is released
On Monday, preliminary manufacturing PMI for December in France, Germany, Eurozone and the UK
At 21:30 on Monday, the US New York Fed Manufacturing Index for December;
Tuesday 15:00, UK October three-month ILO unemployment rate, UK November unemployment rate, UK November unemployment benefit applicants;
Tuesday 17:00-18:00, Germany's December IFO business climate index/ZEW economic sentiment index; Eurozone December ZEW economic sentiment index, Eurozone October seasonally adjusted trade account;
At 21:30 on Tuesday, Canada's November CPI monthly rate/annual rate and the US November retail sales monthly rate;
At 15:00 on Wednesday, the UK November CPI monthly rate and the UK November Retail Price Index monthly rate;
At 18:00 on Wednesday, the final annual CPI value of the euro area in November and the initial monthly CPI value of the euro area in November will be released;
At 21:30 on Wednesday, the total annualized number of new housing starts in the United States in November, the third quarter current account of the United States, and the total number of building permits in the United States in November;
At 21:30 on Thursday, the revised annualized quarterly rate of real GDP in the third quarter of the United States, the preliminary quarterly rate of real personal consumption expenditures in the third quarter of the United States, and the December Philadelphia Fed manufacturing index of the United States will be released;
The Federal Reserve's preferred underlying inflation measure, the personal consumption expenditures price index (PCE), will be released next Friday. Economists predict that PCE (excluding food and energy) in November, released on Friday, may rise 0.2%, the smallest increase in three months. The report will also show solid growth in consumer spending and income, indicating that the economy is resilient. U.S. retail sales data for November on Tuesday may also show similar strength.
In Canada, Finance Minister Chrystia Freeland will unveil her long-delayed budget update amid widespread speculation she has reneged on a pledge to keep the deficit at or below C$40.1 billion. The document is likely to include new border security spending to guard against Trump's tariff threats and affordability measures aimed at winning back voters ahead of next year's election. In a year-end speech, the Bank of Canada governor will reflect on the extraordinary pace of rate cuts and look ahead to a possible trade war. The country's headline inflation rate is expected to fall below the 2% target again in November after a brief rebound to the 2% target in October.
In the euro zone, survey indicators are likely to keep investors focused on how the fallout from political turmoil in France and Germany is affecting businesses. The region’s latest purchasing managers’ index will be released on Monday, followed the next day by the Munich-based Ifo institute’s index of company expectations and the ZEW investor sentiment index, both for Germany.
Timothy Graf, head of macro strategy for Europe, the Middle East and Africa at State Street Global Markets, expects more gains for the dollar, noting that the Federal Reserve’s easing cycle may prove shallow relative to weaker economic growth in Europe.
Company financial reports: Will the “Christmas rally” in US stocks come?
In terms of financial reports, only a few companies such as Micron Technology, FedEx and Accenture are worth paying attention to. The new round of financial reporting season will begin next month.
A sharp rise in U.S. technology stocks pushed the Nasdaq Composite Index above the 20,000 mark for the first time this week, a new milestone for U.S. stocks. However, U.S. stocks face a test after setting a new high. An analysis report from Bespoke Investment Group pointed out that in December, there was no trading day in the S&P 500 index when there were more rising stocks than falling stocks. According to their calculations, this is the longest period in more than 20 years.
However, Scott Rubner, a senior fund flow expert at Goldman Sachs, believes that with the market pricing in a 97% chance of a rate cut by the Federal Reserve at its December meeting, the S&P 500 will see a "Santa Claus rally" in the last few trading days of 2024. In Rubner's view, the 2024 rally in U.S. stocks is now expected to continue into 2025. The Goldman Sachs strategist said that U.S. companies have approved $1 trillion worth of stock buybacks in 2025, which could also drive a big rally in the stock market.
Article forwarded from: Jinshi Data
