Fed Switches Off Autopilot

For the week ending 15 November 2024

As of midday Friday, global equities were lower on the week as the focus shifted from post-election exuberance to a less-certain easing path from the US Federal Reserve. The yield on the US 10-year Treasury note rose 20 basis points to 4.50%. The price of a barrel of West Texas Intermediate crude oil fell to $68.10, down about $3.20 from a week ago. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), slipped to 15 from 15.6 last Friday.

MACRO NEWS

Powell: No hurry to cut rates

Speaking in Dallas on Thursday, Fed Chair Jerome Powell said that the US economy isn’t signaling a need for the Fed to hurry rate cuts and that “if the data let us go slower, it seems like the right thing to do”. The labor market has cooled but remains solid, he said, and the economy’s recent performance has been remarkably good. Inflation, the Fed chair added, is on a “sometimes-bumpy path” toward 2%, but the central bank believes it is on a sustainable path toward its target. Powell said the strong economy allows the Fed to approach policy decisions carefully. The central bank will have time to assess the net effect of the new administration’s policy changes and won’t change monetary policy until there is greater certainty, he said. The odds of a December rate cut slipped after Powell’s remarks and markets no longer expect cuts at every meeting. 

US inflation progress continues to level off

The US Consumer Price Index rose 0.2% for the fourth-straight month in October and gained 2.6% from a year ago, the first time that measure has risen since March. Core inflation rose 0.3% for the third-straight month and held steady at 3.3% compared with a year ago. All four readings were in line with expectations, though Powell said after producer price data on Thursday (core rose 0.3% month over month in October) that recent inflation data were “a bigger bump than expected”. While investors were relieved that prices didn’t rebound more strongly, there is a growing sense that the pace of US disinflation progress has leveled off. As a result, fewer rate hikes are being priced in and a December cut is no longer seen as a sure thing.

GOP retains control of US House 

With races in six congressional seats yet to be called, Republicans reached the 218-seat threshold to gain control of the US House of Representatives on Wednesday. Of the remaining races, Republicans lead in three of them. The leadership of the House will remain unchanged, with Representative Mike Johnson (R-LA) staying on as Speaker. John Thune, (R-SD) was elected Senate majority leader, replacing Mitch McConnell. Three GOP members of the House have been appointed to President-elect Donald Trump’s cabinet, necessitating special elections to fill their seats, potentially temporarily chipping away at the Republicans’ slim majority. Trump has announced a number of cabinet nominees but has yet to fill out his senior economics team.

QUICK HITS

US retail sales rose 0.4% from the month before in October while September sales were revised up to 0.8% from an initial 0.4% gain. Strong auto sales helped boost the headline figure, but core sales, which strip out autos, gasoline and building materials, declined 0.1% from the month before.

On Monday, the S&P 500 Index closed above 6,000 for the first time.

Japanese Prime Minister Shigeru Ishiba won a runoff parliamentary vote to stay on as the country’s prime minister and will a lead minority government. After the vote, Ishiba said he wants to meet with President-elect Trump as soon as possible. Also this week, the government announced it will invest $65 billion in chip plants to be built in Japan and that it is planning an $87 billion stimulus package.

European Commission President Ursula von der Leyen reportedly hopes that one way to deter Trump from imposing new tariffs is for Europe buys more US liquefied natural gas.

Taiwan is reportedly considering big US defense purchases to show the new Trump administration it is serious about protecting itself from China.

On Thursday, Bank of England Governor Andrew Bailey urged the UK government not to counter protectionism with tariffs.

In the latest effort to curb exports of critical technologies, Taiwan Semiconductor Manufacturing Company has been ordered by US authorities to halt shipments of advanced chips to China.

German lawmakers decided that early elections will be held on 23 February after the governing coalition collapsed last week.

Fed Governor Christopher Waller this week downplayed the use case for a US digital currency, saying he is not sure what problem it solves.

The US budget deficit rose to $257.5 billion in October from $66.6 billion in October 2023.

The Bank of Mexico cut its overnight rate 0.25% to 10.25%, the third cut in a row.

Bitcoin continued to rally in the wake of Trump’s victory, breaking $93,000 on Thursday.

US President Joe Biden and China’s Xi Jinping will meet Saturday on the sidelines of the APEC summit in Peru.

Dallas Fed President Lorie Logan this week called for caution on rates cuts, saying the level of the neutral rate of interest is uncertain. Logan said a large part of the recent rise in bond yields reflects rising term premium.

According to Crane Data, as of 13 November, US money market assets surpassed $7 trillion for the first time.

The Bank of France expects the French economy to stagnate this quarter.

The Fed’s October Senior Loan Officer Opinion Survey shows that banks are no longer raising standards for key lending categories.

Retail sales in China got a boost in October, beating estimates by rising 4.8% from a year ago as government measures to stabilize the economy were announced. Industrial production expanded 5.3% year over year, though the property market remained in the doldrums, with residential sales falling 22%.

Various sources reported Thursday that Trump plans to eliminate the $7,500 electric vehicle tax credit.

To help diffuse tensions, Elon Musk, acting as an emissary for Trump, reportedly met with Iran’s ambassador to the United Nations in New York. The talks were described as positive.

THE WEEK AHEAD

Tuesday: Eurozone and Canadian CPI

Wednesday: Nvidia earnings, UK CPI

Thursday: US existing home sales

Friday: Japan CPI, global flash purchasing managers’ indices