A Look at the Day Ahead in U.S. and Global Markets

By Mike Dolan

The dollar continues to rise due to an anxious pre-election climb in U.S. Treasury yields, reaching its best levels in almost three months against the euro and yen, influenced by contrasting economic and interest rate conditions.

With the International Monetary Fund's (IMF) annual meeting in progress and G7 finance chiefs and central bankers convening, the exceptional performance of the U.S. economy was highlighted in updated IMF global forecasts on Tuesday.

The IMF has raised its 2024 and 2025 U.S. GDP growth forecasts again; by two-tenths of a percentage point to 2.8% for this year and three-tenths of a point to 2.2% for 2025.

While global growth forecasts largely remained unchanged, the U.S. GDP outlook for this year and next has increased by a cumulative 0.7 and 0.5 points respectively since January. Among the G7, only Canada is anticipated to grow faster than the United States next year.

U.S. economic surprise indexes are at their highest since April, partly explaining the sharp rise in Treasury yields this month and the increasing 'terminal rate' for Federal Reserve easing expectations.

Election anticipation is also driving Treasury yields and the dollar as markets lean towards a victory for Republican Donald Trump on Nov. 5, amid concerns over potential effects on U.S. budget deficits and inflation.

Ahead of a 20-year bond auction, 10-year yields reached their highest since July at 4.24%, climbing 25 basis points in a week. The New York Fed's measure of 10-year Treasury 'term premium' exceeded 20bps for the first time this year.

However, election predictions remain uncertain, with the latest Reuters/IPSOS poll showing Democrat Kamala Harris three points ahead nationally and other polling indicating a tight race in swing states.

Beyond the election, the dollar benefits from overseas interest rate outlooks. The Bank of Canada is expected to lower its rates again, while Europeans are contemplating interest rate cuts to stimulate the economy, contrasting with rising U.S. expectations of a terminal rate around 3.5%.

The yen weakened past 152 per dollar for the first time since July before Japan's weekend election. These shifts in the rates markets have impacted stock markets, with Wall Street indexes stalling and futures in the red.

In the earnings sector, major companies like Tesla, Boeing, and IBM have upcoming announcements. Deutsche Bank shares fell by 3% after raising its loan-loss provision forecasts amidst a weak German economy, although it returned to profit. McDonald's shares dropped nearly 6% due to an E. coli outbreak linked to its Quarter Pounder hamburgers.

Key Developments for U.S. Markets Later Today:

• Bank of Canada policy decision and news conference with Governor Tiff Macklem.
• U.S. September existing home sales and the Federal Reserve's Beige Book on economic conditions.
• G7/G20 finance chiefs meeting at the IMF and World Bank Annual Meetings in Washington.
• Corporate earnings announcements from Tesla, Boeing, IBM, and several others.
• U.S. Treasury auction of $13 billion in 20-year bonds.

(By Mike Dolan, [email protected])