Diary Week 71: Twas The Week Before Christmas

'Twas the week before Christmas, when all through the house Not a trader was stirring, not even a mouse The stockings were hung by the chimney with care In hopes that St. Nicholas soon would be there

The PM's were nestled all snug in their beds, While visions of payouts danced in their heads And Jay wondered whether or not The scrooge of Christmas was again his lot.'

Next week is essentially it for the year in terms of data and guidance and to me it looks like "lose-lose" for the long end of the curve.

If, as expected, the Fed cuts we all know they are not doing it because they want to. If they move (no it is not the 100% probability the market would have you believe although highly likely) they are doing so because they could not get enough cover from the recent employment and inflation data, such that a pause would not look political.

That means they should not be cutting, and I think we should remember what happened on the long end of the curve when they cut 50 bp's in September and the market questioned the logic. Over a space of 5 trading days (including Fed day ) the 30-year bond yield rose 20 bp's and the 2's 30's curve steepened dramatically, I think there is a danger we can see something similar this time because (IMO) it is going to be a very hawkish cut with a clear signal that they will likely not move in January.?

I actually think that the "scrooge of 2018" from Christmas past may revisit next week. While back then (19 Dec 2018) the Fed hiked as expected we got a very hawkish outlook from Jay Powell about what 2019 held. Of course, we also know that the Fed never raised again in that cycle and actually ended up cutting in September that year- But that is 2025's news .

What will this hawkish cut (still a tiny chance they don't move) deliver to other markets?

The USD will like it and send all the "seasonal USD bears into a tizzy" (The USD Index has fallen 7 Decembers in a row but if as expected yields move higher then as Scrooge comes down the chimney seasonality will go out the front door.)

Gold will not like it and take another leg lower (All else equal US yields up and USD up makes Gold wobble). Given how far we have come I would not be surprised if Bitcoin also takes it "on the chin" as markets continue to thin out.

I suspect, as in 2018, the Equity market might also take the 'scrooge fest" to heart and have a mini "heart attack" into Christmas. The NASDAQ is probably most susceptible here? That's it for now- Short and sweet.

Next week, watch out for this year's 12 Charts Of Christmas looking ahead to markets in 2025