The U.S. November non-farm payroll data, which has garnered much attention this week, was better than expected, but not hot enough to prevent the Fed from cutting rates again later this month. The market raised the probability of a 25 basis point cut in December to about 90%. Meanwhile, more and more Fed officials tend to cautiously support rate cuts.
The U.S. dollar index briefly fell after the non-farm payroll data was released on Friday, but rebounded with support from short covering after the University of Michigan's consumer sentiment index for December exceeded expectations, reaching an 8-month high, and the index ended the week up 0.22%. The resilience of the U.S. economy continues to support the rise in U.S. stocks, with the S&P 500 and Nasdaq indices rising for the third consecutive week, up 0.96% and 3.34%, respectively. The Dow Jones index fell by a cumulative 0.6%. In commodities, rising rate cut expectations have kept gold steady, but it still recorded two consecutive weekly declines. Oil remained sluggish after OPEC+'s delayed production increase, with both oil prices falling for three consecutive days, down more than 1.5% for the week.
Next week, U.S. inflation data is the only significant data that could shake expectations for a Fed rate cut in December. Additionally, several central banks will announce rate decisions, including the Reserve Bank of Australia, the Bank of Canada, the Swiss National Bank, and the European Central Bank. Here are the key points the market will focus on in the new week (all times are Beijing time):
Central Bank Dynamics: Federal Reserve officials are making rounds of statements before the quiet period, and several central banks will announce rate decisions.
Federal Reserve:
The Federal Reserve enters its regular quiet period;
After data showed that the U.S. labor market remains strong but also shows signs of slowing, Fed officials seem poised to cut rates this month, but the debate about potentially pausing rate cuts next year has already been tabled. Policymakers speaking before the Fed's quiet period have generally indicated that they expect rates to continue to decline while maintaining a cautious approach to the pace of rate cuts.
San Francisco Fed President Daly stated that the latest data indicates the labor market is in good condition. Although she did not express discomfort with a potential rate cut later this month, she said that as the Fed reaches a 'roughly appropriate' level for policy rates, she advocates a gradual approach to rate cuts. Daly previously stated that her personal estimate for the neutral rate is around 3%. Chicago Fed President Goolsbee also estimates the neutral rate to be around 3%, hoping to find a moment to stop rate cuts before the end of next year. Harker, in her first major policy speech since taking the helm of the Cleveland Fed in August, also stated that she believes rates need to decline over time, but given that inflation remains high and the labor market is robust, 'we are at or approaching a stage of slowing the pace of rate cuts.'
After the non-farm payroll data was released, traders believe the likelihood of the Federal Reserve cutting rates at the December policy meeting has increased, and they have increased bets that the policy rate will decline by another 75 basis points next year, a magnitude smaller than what policymakers indicated in the September dot plot. They will update their forecasts at this month's meeting.
Earlier this week, Federal Reserve Governor Waller, viewed as a hawkish representative, stated that he leans toward a rate cut in December but will reserve final judgment to review the latest employment and inflation data. Fed Chair Powell reiterated his earlier comments that the strong U.S. economy allows policymakers to proceed cautiously in continuing to lower rates. Powell's cautious stance may carry more significance for the prospects of rate cuts next year, as many analysts expect the Fed to pause its easing policy after the rate cut on December 18.
At least one policymaker may be more supportive of pausing rate cuts in the short term. Fed Governor Bowman reiterated her preference for cautiously lowering rates and emphasized that core inflation remains 'uncomfortably' above the 2% target level. Bowman stated that the upside risks to price growth remain 'prominent.' She noted that progress on inflation seems to have stalled and expressed that she still believes inflation is more concerning than the labor market.
Mark McCormick, head of forex and emerging markets strategy at Dominion Securities, wrote in a research report: 'The employment report is noisy but weak enough to reinforce positioning adjustments across the forex market. Next week's CPI data may be the last useful data point for the Fed's December meeting, but we still believe the path of least resistance for the dollar is to weaken, which would provide an excellent opportunity for investors to buy the dollar on dips in early 2025. Fxstreet analysts point out that the dollar's target is to recover its 20-day moving average (SMA), and as long as the index remains below this level, it may exacerbate its short-term predicament.
Other Central Banks:
Tuesday 11:30, the Reserve Bank of Australia announces its rate decision; 12:30, Reserve Bank of Australia Governor Lowe holds a monetary policy press conference
Wednesday 22:45, Bank of Canada announces its rate decision;
Thursday 16:30, Swiss National Bank announces its rate decision;
Thursday 21:15, European Central Bank announces its rate decision; 21:45, ECB President Lagarde holds a monetary policy press conference
The Reserve Bank of Australia will hold its last policy meeting of the year on Tuesday, with the market speculating that it will keep rates unchanged and may open the door to rate cuts in February next year.
Data released this week showed unexpectedly weak GDP growth figures for Australia's third quarter. Treasurer Jim Chalmers stated that without strong spending from state and federal governments, the economy could have contracted. Chalmers asserted that for some time, growth has relied on government spending as its engine, and without it, this commodity-rich economy would slip into recession.
If Reserve Bank of Australia Governor Lowe does indeed indicate a shift in thoughts at the press conference, it would be a very significant dovish signal, as it has been over a year since the RBA last adjusted rates, and until recently, she had once again ruled out the possibility of cutting rates in the short term. Most economists currently expect the RBA to wait until May next year before cutting rates. Another agenda item to watch this week will be Deputy Governor Hatcher's speech to economists on Wednesday. Hatcher recently stated that due to core inflation being 'too high,' a rate cut cannot be considered in the short term. If he abandons this view, it would send a strong signal to the market that the RBA is preparing for a rate cut in February.
The latest rate decision from the Bank of Canada will be announced on Wednesday. The market generally expects the central bank to cut rates, but there is disagreement on whether the cut will remain at 50 basis points or revert to the more typical 25 basis points. With Canada's unemployment rate continuing to rise in November, expectations have warmed for the Bank of Canada to possibly cut rates significantly for the second consecutive time. The Canadian swap market estimates a 65% chance of a 50 basis point cut next week, up from 58% before the employment data was released. Corpay's chief market strategist Karl Schamotta also pointed out that the prospect of high tariffs imposed by President-elect Trump could prompt policymakers to make larger rate cuts. The rising uncertainty around tariffs 'may lead policymakers to preemptively cut rates to address potential further weakness in the economy.'
The Swiss National Bank will announce its interest rate decision on Thursday. As the first major country in the G10 to ease monetary policy, Switzerland has cut rates three times since March, and it is widely expected to cut rates again in December, which would be the first policy decision made by new governor Martin Schlegel since taking office in October. However, the extent of the rate cut is also uncertain, with the probability of a 50 basis point cut slightly rising to over 60% after the CPI data came in below expectations. Schlegel's dovish comments also support the possibility of further rate cuts by the Swiss National Bank, as he has repeatedly suggested reintroducing negative rates if necessary. If the Swiss National Bank decides to cut rates by 50 basis points, the Swiss franc may fall again against the U.S. dollar. However, if policymakers stick to a 25 basis point cut, the Swiss franc may continue its recent recovery.
The European Central Bank will also hold its last policy meeting of the year. Most market participants generally expect the ECB to cut rates by 25 basis points, with OIS currently indicating a 92.2% probability of this happening, although a more hawkish member of the ECB's governing council has suggested keeping an open mind about discussing a 50 basis point cut. Attention will focus on the ECB's quarterly forecast and any potential guidance on policy prospects for next year. According to a media survey, most respondents expect the ECB to lower its economic growth forecast for 2025 and revise down inflation expectations for this year and next.
The market has exited bets on a significant rate cut by the European Central Bank, helping the euro stabilize against the dollar. However, due to weak economic conditions, along with renewed political turmoil in France, some traders are betting that the European Central Bank will have to be more aggressive in policy easing in the coming months, which may pressure the euro. If ECB President Lagarde unexpectedly makes dovish comments at the post-meeting press conference on Thursday, it could trigger a new round of selling in the euro.
Important Data: Will CPI Raise the Threshold for Rate Cuts? A breakthrough at this level will trigger technical buying in gold.
Monday 7:50, Japan's third-quarter real GDP annualized quarterly rate revision
Monday 9:30, China's November CPI year-on-year
Monday 17:30, Eurozone December Sentix investor confidence index
Monday 23:00, U.S. October wholesale sales month-on-month
Monday TBD, China November M2 money supply year-on-year
Tuesday 0:00, U.S. November New York Fed 1-year inflation expectations
Tuesday 19:00, U.S. November NFIB small business confidence index
Wednesday 1:00, EIA releases monthly short-term energy outlook report
Wednesday 21:30, U.S. November CPI and core CPI
Wednesday 23:30, U.S. EIA crude oil inventory for the week ending December 6
Wednesday TBD, OPEC releases monthly oil market report (exact publication time TBD, generally around 18:00-21:00 Beijing time)
Thursday 2:00, U.S. 10-year Treasury bond auction
Thursday 8:30, Australia's adjusted unemployment rate for November
Thursday 17:00, IEA releases monthly oil market report
Thursday 21:30, U.S. initial claims for unemployment benefits for the week ending December 7; U.S. November PPI year-on-year and month-on-month
Friday 1:00, the Federal Reserve releases accounts of fund flows for the third quarter of 2024
Friday 8:01, UK December Gfk consumer confidence index
Friday 15:00, UK October three-month GDP month-on-month
Friday 18:00, Eurozone October industrial production month-on-month
Friday 21:30, Canada's October wholesale sales month-on-month
Friday 21:30, U.S. November import price index month-on-month
The U.S. inflation data released on Wednesday may be the key indicator that ultimately determines whether the Fed will cut rates at the December meeting. Market expectations for a Fed rate cut in December have yet to form an overwhelming consensus. Strong inflation data may keep the Fed on hold, triggering fluctuations in the dollar and U.S. bond yields.
Analysts at BNP Paribas expect that even if inflation data comes in slightly above expectations, the Fed will cut rates in December. They stated in a report: 'Given that rates remain restrictive and have already laid the groundwork for pausing rate hikes next year, we believe most Fed officials will be willing to continue with the rate cut in December.'
Dominion Securities U.S. rate strategist Molly McGown stated that following the employment data release, the upcoming CPI will become a 'higher threshold' for the Fed to pause its rate cut plans at the next meeting. Dominion Securities expects the Fed to pause rate cuts early next year, as policymakers will assess Trump's fiscal policy after he takes office in January. 'We learned from Powell that once he knows what the actual policy is, he will begin to incorporate it into the policy framework,' McGown said.
However, JPMorgan Asset Management bond expert Bill Eigen warned the market before the Fed's next meeting that the space for Fed rate cuts may not be as large as it imagines, and central banks should refrain from cutting rates again in December. He added that there are signs that the U.S. economy is starting to heat up again, including strong GDP growth, slightly higher-than-expected inflation data from last month, and record stock prices. Wages, services, and housing inflation appear especially sticky and may even rise. Housing prices remain one of the biggest drivers of inflation in October, up 4.9% year-on-year. The Fed has cut rates by 75 basis points so far this year and may be closer to the neutral rate than it believes.
With the fluctuations in expectations for Fed rate cuts and ongoing geopolitical maneuvering, gold still struggled to make decisive movements in either direction this week. Ole Hansen, head of commodity strategy at Saxo Bank, stated that the employment data did not 'change the prospects of a Fed rate cut in two weeks.' He said that Fed easing may coincide with rate cuts in the Eurozone and Switzerland, which could be 'beneficial for gold' before liquidity declines ahead of the holidays and year-end. Gold prices have been trading within a narrow range since falling from historic highs in late October. Nevertheless, supported by purchases from the Fed and central banks, gold prices have still risen by more than a quarter this year. The People's Bank of China increased its gold holdings by 160,000 ounces at the end of November, resuming purchases after a six-month hiatus.
Fxstreet analysts pointed out that the relative strength index (RSI) on the daily chart for gold hovers around 50, reflecting a lack of directional momentum. The first resistance level indicated by the 23.6% Fibonacci retracement of the upward trend since June and the 50-day moving average is $2670. If the gold price rises above this level and starts to hold it as support, technical buyers may show interest. In this case, $2700 may be seen as the next upward barrier, followed by $2720 and $2760. On the downside, the first support level may be at the 38.2% Fibonacci retracement level of $2600, followed by the 100-day moving average of $2580 and the 50% Fibonacci retracement level of $2540.
For the yen, the revised third-quarter GDP data released on Monday may be a key event next week. If the data paints a positive picture of Japan's overall economic situation, it may strengthen the case for the Bank of Japan to raise rates, thereby boosting the yen. This week, Bank of Japan Governor Ueda's statement that 'rate hikes are imminent' caused the yen to surge briefly. He reiterated that authorities would raise rates if economic performance meets expectations.
In Australia, employment data for November will be released on Thursday. Despite the economic slowdown, companies are still hiring, and the unemployment rate is low. City Index market analyst Matt Simpson said that if Australia's third-quarter GDP data is weaker than expected, it could trigger more calls for the Reserve Bank of Australia to cut rates, which would be enough to pressure the Australian dollar. However, the analyst also added that this data is unlikely to force the Reserve Bank of Australia to ease monetary policy. 'Inflation is still too high, and employment data remains strong,' he added.
Next week, the oil market will welcome several heavyweight reports, and investors will use these to understand the views of major institutions on supply and demand prospects. Forex market analyst Fawad Razaqzada stated that despite OPEC+ extending production cuts, the market still does not believe these actions are sufficient to support oil prices. Before demand recovers more balanced or supply tightens, oil may find it difficult to escape its current bearish pattern. From a technical perspective, WTI crude oil struggled again after failing to break through the key resistance range of $69-70 per barrel earlier this week and fell below the $68 mark, making it a new key resistance level to watch in the future. The current support range is between $66.50 and $67.00, and if this area is broken, it could bring attention to the September low of $64.94, or even the May 2023 low of $63.60.
Corporate Earnings Reports: U.S. stocks face a critical test, will the year-end market not reverse easily?
The U.S. earnings season is nearing its end. The inflation report to be released next week may be key data affecting the Fed's rate cut plans, thus testing the resilience of the U.S. stock market's record rally. The market expects the Fed to further cut rates while the economy remains resilient, highlighting an optimistic outlook for the stock market.
Historically, the stock market is expected to perform strongly under these circumstances; however, the CPI to be released on Wednesday may pose a challenge to the soaring stock market. Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, stated: 'If the data is too hot, I do believe the stock market will have a hard time digesting it. This will bring some uncertainty before the Fed meeting.' Miskin stated that if the CPI exceeds expectations, the Fed could implement a 'hawkish rate cut' by lowering expectations for rate cuts in 2025 rather than pausing rate cuts.
Nevertheless, the stock market continues to rise, raising concerns that market sentiment has become overly optimistic. According to data from LSEG Datastream, the S&P 500 forward 12-month price-to-earnings ratio is 22.6 times, the highest level in more than three years. Yardeni Research cited indicators such as bullish sentiment from investment advisors and foreign private investors buying U.S. stocks, stating, 'contrary indicators are turning bearish.'
However, some investors believe that the outlook for the stock market looks solid heading into the end of the year, as the market is in a seasonally strong period. Mark Hackett, head of investment research at Nationwide, stated, 'The bearish arguments from earlier this year—such as employment market pressures, interest rate volatility, uncertainty around the Fed, and geopolitical tensions—have significantly eased, and it is hard to see how this trend could reverse before the end of the year.'
Article reposted from: Jin Shi Data