Markets Moderate US Rate-Cut Expectations

For the week ending 11 October 2024

As of midday Friday, global equities were modestly firmer on the week, trading near record levels. A more moderate pace of interest rate reductions from the US Federal Reserve now priced in, the yield on the US 10-year note rose 0.14% from a week ago to 4.10%. The price of a barrel of West Texas Intermediate crude oil rose $1.15 to $75.35 on continued uncertainty over whether Israel intends to attack Iranian oil production. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), slipped to 19.5 from 20.4 a week ago.

MACRO NEWS

Market pricing in fewer US rate cuts

Heading into last Friday’s US employment report, markets were pricing in 0.67% of easing from the Fed before the end of the year, but after the strong labor data, an uptick in consumer prices on Thursday and a rise in weekly jobless claims (likely linked to Hurricane Helene), investors have trimmed that to 0.45%. Federal Reserve Bank of Atlanta President Raphael Bostic said in an interview with the Wall Street Journal on Thursday that he is comfortable with skipping cutting rates at a meeting if the data suggest that would be appropriate, adding that he would be open to pausing rate cuts in November. Long rates have risen sharply over the past week, with the US 10-year note now yielding 4.10% amid stickier-than-desired supercore inflation.

Investors eye China MoF briefing

After returning from the Gold Week holidays on Tuesday, investors in China were disappointed that a briefing from the National Development and Reform Commission, China’s top economic planner, offered no additional details on plans to stimulate the country’s economy. News Wednesday that the China’s finance minister, Lan Fo’an, would hold a briefing on Saturday revived speculation that additional measures could be in the offing. Chinese shares paused to catch their breath this week after a furious rally sent prices soaring by about 30% in the runup to Golden Week.

France seeks to trim deficit

French Prime Minister Michel Barnier, in a speech to the National Assembly this week, outlined his budget plan for 2025. Barnier proposes to cut spending and raise taxes by about €60 billion, or 2% of GDP. Two-thirds of the deficit reduction would come from lower spending and the rest from higher taxes. The budget also calls for a reduction of France's civil service payroll, as well as a freeze on regular increases in pensions. Spreads between French government bonds and their German counterparts remain rangebound with French debt yielding about 0.77% more than a 10 year bund.? With France’s public finances in the spotlight, the potential remains for credit ratings agencies to take a dim view of the reforms as insufficient. This week, Barnier survived a confidence motion brought by left-wing deputies.

Trump advisor floats idea of shadow Fed chair

In an interview with Barron’s, hedge fund manager and Trump campaign advisor Scott Bessent floated the idea of former President Donald Trump, if he is reelected, nominating and seeking Senate confirmation of a Fed chair-in-waiting long before current Chair Jerome Powell’s term expires in May 2026. Bessent thinks that “based on the concept of forward guidance, no one is really going to care what Jerome Powell has to say anymore” if his successor is waiting in the wings. In the interview, Bessent, who is believed to be in the running to be Treasury secretary in a second Trump term, made clear that he doesn’t speak for the campaign and that the idea is his alone. The plan relies on Republicans retaking control of the Senate and could contribute to a rise in volatility.

QUICK HITS

The US Consumer Price Index rose 0.2% from the month before in September and 2.4% year over year. The core rate rose 0.3% on the month and 3.3% from a year ago. The Producer Price Index was unchanged in September from the month before and rose 1.8% from a year earlier.

The US government budget deficit rose to $1.8 trillion in its fiscal year 2024, or about 6.2% of GDP.

Base pay in Japan rose by a record 2.9% year over year in August, the labor ministry reported on Tuesday.

Canada’s unemployment rate ticked down to 6.5% in September as the country added 46,700 new jobs, exceeding estimates by nearly 20,000.

Eurozone retail sales rose 0.2% from the month before in August and gained 0.8% year over year.

Chinese state broadcaster CCTV reported that the number of home shoppers rose during the Golden Week holiday. Travel spending during Golden Week beat expectations but failed to reach pre-COVID levels.

The Reserve Bank of New Zealand cut its official cash rate 0.5% to 4.75% this week.

The German government expects its economy to contract for a second straight year after downgrading its 2024 GDP forecast to -0.2%. ?

South Korean government bonds will be phased into the FTSE World Government Bond Index (WGBI) beginning in November 2025 while India will join its emerging market index.

On Wednesday, the S&P 500 Index closed at an all-time high of 5,792.

US Republican presidential nominee?Donald Trump?said he supports lowering taxes on US citizens who live abroad and making interest on auto loans fully tax deductible.

Millions were left without power after Hurricane Milton struck Florida’s west coast as a Category 3 storm and swept through the state Wednesday night. Damage is estimated in the tens of billions of dollars amid deaths related to the storm.

A study by the US Congressional Budget Office found that the cost of GLP-1 medications exceeds any resulting savings in obesity-related medical care.

Ukrainian President Volodymyr Zelensky said current battlefield conditions will allow for a negotiated end to the Ukraine conflict in 2025 at the latest.

US Social Security recipients will receive a 2.5% cost of living adjustment in 2025, the smallest increase since 2021.

THE WEEK AHEAD

Saturday: China’s Ministry of Finance holds a press conference on stimulus measures

Monday: The Federal Reserve Bank of New York releases its survey of consumer expectations. Fed Governor Christopher Waller speaks.

Tuesday: UK unemployment, ZEW expectations survey for the eurozone, Canada CPI

Wednesday: UK CPI

Thursday: Eurozone CPI, ECB meeting (quarter-point rate cut expected), US retail sales, industrial production

Friday: Japan CPI, UK retail sales, US housing starts and building permits

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Sources:?MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.