A dismal December could follow as stock markets struggle, although there are still signs that the central banks of Australia, Canada and the United States are moving closer to cutting interest rates
- Analysts expect central banks in Australia and Canada to join the global monetary policy shift.
- US economic data could point to labor market weakness and underpin the Fed's interest rate cuts.
- If stocks struggle despite signs of impending economic stimulus, we're in for a bleak December.
Dramatic movements in the bond market dominated the financial markets last week. Interest rates fell across all maturities as two- and 10-year Treasury bonds posted strong gains.
The move reflected a much more moderate adjustment in monetary policy expectations. Most critically, markets now expect the Federal Reserve to cut interest rates by 25 basis points (bps) by May and a total of 125 bps (or 1.25%) of easing next year.
The increase in risk appetite from this seemingly strong adjustment was ominously modest. The benchmark S&P 500 index gained 0.71%, while the high-flying Nasdaq was flat. In a seemingly counterintuitive way, the dollar strengthened and crude oil fell. A sharp rise in the price of gold was perhaps the most “textbook” response.
Below are the key macroeconomic waypoints for traders in the coming week.
Reserve Bank of Australia (RBA) interest rate decision.
Australia's central bank is expected to leave its target interest rate unchanged at this week's monetary policy meeting. The expected policy stance, priced into markets, has moved in a decidedly dovish direction since the last RBA meeting a month ago. Bets on further tightening have become irrelevant. A 25 basis point rate cut is likely by the end of 2024.
The pain ravaging Australia's economy is only getting worse. November Purchasing Managers' Index (PMI) data points to the fastest decline since August 2021, the worst of the COVID-induced downturn. Data released just last week showed stronger disinflation and slower credit growth than expected in October.
Should this lead to a softening of the hawkish tone of the RBA's policy statement, traders could bring forward their interest rate expectations. Markets may rejoice at the sight of another major central bank pursuing loose monetary policy and driving stocks higher as yields fall.
On the other hand, stocks and bonds posted huge gains in November after markets concluded that the Fed had ended its rate hike cycle. This loosened credit conditions worldwide. Next, market focus could turn to the sharp slowdown that triggers the policy shift. In this world, a dovish turn from the RBA is a “risk aversion” signal.
Source: Bloomberg
Bank of Canada (BOC) interest rate decision.
The next test of markets' evolving perspective on the global shift in monetary policy will come from Canada. The priced-in path that Governor Tiff Macklem and Co. have ahead of them is strikingly similar to the path analysts expect from the Fed – and for good reason. Canada's economic cycle is closely linked to that of its southern neighbor.
Analysts do not expect any further interest rate increases. The first interest rate cut of 25 basis points should take place in April at the latest. Three of them are fully included in the forecast for 2024, and the probability of a fourth is 19%. Here, too, there was a clearly moderate adjustment in November. PMI data is also trending, pointing to an accelerating decline in economic activity.
As with the RBA, market reaction will be instructive given further signs of a broad turnaround in global interest rate policy. If last month's cheers over cheaper money give way to worries about the onset of a recession, the year could well end painfully for stocks as well as growth-oriented commodities and currencies.
Source: Bloomberg
US employment data
On the U.S. economic data front, a series of key labor market releases culminate in November wage and unemployment figures on Friday. Earlier, the Job Openings and Labor Turnover Survey (JOLTS) is expected to show job vacancies hit a three-month low in October, while the Institute of Supply Management (ISM) updates the pace of hiring in the services sector, a key input into the the Fed's political calculations.
The banner's release at the end of the week is expected to generate 186,000 new non-farm jobs, a slight increase from October's 150,000. The unemployment rate remained unchanged at 3.9%, while average hourly wage growth – a measure of wage inflation – slowed to a 29-month low of 4% year-on-year.
Leading PMI data from S&P Global suggests that manufacturing and services employment contracted simultaneously in November for the first time since mid-2020. Echoes of that weakness reflected in this week's news could help underpin the tectonic move in monetary policy bets over the last month.
As elsewhere, the key question to answer now is whether markets remain in a mood to rejoice at the prospect of cheaper money or shudder at the thought of why this will come about.
Source: Bloomberg
Ilya Spivak, tastelive, Head of Global Macro, has 15 years of trading strategy experience and specializes in identifying thematic moves in currencies, commodities, interest rates and stocks. He is the host Macro money and co-hosts Over time, Monday – Thursday. @Ilyaspivak
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