A look at the day ahead in US and global markets from Mike Dolan
As Wall Street heads out for the four-day Thanksgiving holiday, stock prices are being replaced by inflation angst as the Federal Reserve receives another price check.
While major carmakers were successful, broader US stock indexes appeared unfazed on Tuesday by President-elect Donald Trump’s threat of 25% tariffs on imports from Canada, Mexico and China. Hot on the heels were the Mexican peso, the Canadian dollar and their related bourses – while stocks in Europe, Japan and South Korea were also wobbly.
But it gained more than half a percentage point in the session, closing back more than 6,000 at another record high. Futures pulled back slightly ahead of today’s bell.
As trading eased this week, stocks continued to speculate about the extent of Trump’s agenda of tax cuts, tax hikes and a crackdown on immigration. Surveys showing a jump in consumer confidence this month helped.
There was also some relief this week from the easing of the Treasury market, with yields falling in a week of big debt sales – due to mixed optimism about the appointment of money manager Scott Bessent as Treasury Secretary and falling prices following the Israel-Hezbollah standoff. .
Minutes of the Fed’s post-election meeting this month showed policymakers split on how much they would need to cut interest rates from here, avoiding much guidance on the path forward.
Part of the Fed’s problem is visibility over the impact of Trump’s economic plans.
Goldman Sachs’ ‘ready reckoner’, for example, shows a 25% tariff on US goods from Canada, Mexico and China – more than 43% of all US exports – will generate government revenue of approximately 1% of GDP. But, by raising the effective US tariff rate by 8.6%, it will improve the core PCE price index by 0.9%.
On Wednesday you get two cuts to that gauge of personal consumption expenditures — as well as third-quarter GDP updates and monthly updates from October.
The latter is expected to show the annual headline and PCE inflation gauges – the Fed’s favorite measures – back to 2.3% and 2.8% respectively.
Yet Treasury yields continued to decline ahead of that release, returning to levels seen shortly after the November election. Even the market’s inflation expectations, captured by the 10-year inflation or ‘spread’ rates on inflation-protected Treasuries, are also falling.
Some hope for the Treasury may come from indications in the Fed’s minutes that some policymakers believe it may be time to lower interest rates on bank deposits and the money market that park money at the Fed – to return to the lows. of the Fed’s policy rate range.
The so-called overnight reverse repurchase rate, one of two technical borrowing measures the Fed uses to ensure the federal funds rate stays within the target range of monetary policy, is currently set at 4.55%, while the policy rate is 4.5% to 4.75%.
Falling US yields also took steam out of the dollar, whose main index retreated from Friday’s two-year high and jumped sharply against the Japanese yen, which ended up 1.2%.
Some of the measures are exaggerated due to holiday zones and the position of the end of the month.
There was a mixed picture in overseas markets. European stocks continue to fall on everything from trade war concerns to France’s political turmoil over its budget.
European auto stocks fell for a second day on global trade tensions.
French stocks and bonds have been hit hard, making the government’s long-term borrowing costs the highest since the 2012 euro zone debt crisis, as investors grow uneasy about the fate of the new government and its budget.
Prime Minister Michel Barnier told French broadcaster TF1 on Tuesday that France could face financial problems if his government falls. Far-right leader Marine Le Pen has threatened to topple France’s coalition government with a vote of no confidence, due to disagreements with Barnier over the proposed budget, which contains measures to cut spending and raise taxes.
Among French lenders, Societe Generale (OTC:) and BNP Paribas (OTC:) fell about 2% each.
Elsewhere, shares in China and Hong Kong outperformed as data showed a slightly sharper drop in industrial profits, while traders placed bets that Beijing would roll out supportive policies to counter US tax risks.
Key developments that should provide additional guidance for US markets later on Wednesday:
* October US personal income and PCE inflation gauge, October durable goods orders, October trade balance, October pending home sales, weekly jobless claims, Q3 GDP and corporate earnings update and PCE price analysis, Oct retail/wholesale
*European Central Bank Chief Economist Philip Lane speaks
* US company earnings: Autodesk (NASDAQ:)
* The US Treasury sells 44 billion dollars of 7-year notes
