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

By Mike Dolan

A seemingly robust U.S. employment report did little to dissuade markets that another Federal Reserve interest rate cut is coming this month, and China added to the easy money mix on Monday in a historic change of monetary stance.

With the European Central Bank, Swiss National Bank, and Bank of Canada among the major central banks expected to ease policy again this week, markets remain buoyant and Wall Street futures hover near their latest records.

Just three weeks to the end of 2024, the S&P 500 is up almost 28% for the year.

The financial calm comes against more volatile geopolitics. A nervy weekend saw fresh tensions in South Korea and the spectacular collapse of Bashar al-Assad's regime in Syria, throwing another curveball into an already fractious Middle East while undermining the credibility of Assad's foreign sponsors, Russia and Iran.

South Korea's won and stocks fell sharply on the refusal of the ruling party to back the impeachment of the president following a botched attempt at martial law last week. Oil prices ticked up slightly on the Syrian drama.

But Wall St is trying to keep eyes on its own slightly puzzling domestic script and how the world's biggest economy is navigating next month's change of power in Washington. Headlines on November payrolls and average earnings data on Friday appeared to come in at or above forecasts. However, enough signs of weakness in the slightly higher unemployment rate and related household survey prompted futures markets into upping bets on a Fed cut next week.

Currently, those markets see an almost 90% chance the Fed cuts by another quarter point on December 18. The big test of that confidence this week will come from Wednesday's consumer price inflation update.

Fed Chair Jerome Powell may feel more secure in his job, as President-elect Donald Trump on Sunday stated he would not try to remove him before his term ends in 2026. However, central banks around the world are easing as fast, if not faster, than the Fed.

After another alarming inflation miss and signs of persistent deflation pressures, China surprised on Monday with a historic change of its monetary policy orientation. Hong Kong stocks surged more than 2% late in the day after state media cited a Politburo meeting, mentioning that China will adopt an "appropriately loose" monetary policy next year as part of steps to support economic growth.

While that seems anodyne on the face of it, given the headwinds China faces, it marked the first such shift towards loosening since 2010, signaling ways Beijing is bracing for a threatened trade war with the United States under the incoming Trump administration. The central bank has outlined five policy stances: 'loose', 'appropriately loose', 'prudent', 'appropriately tight', and 'tight'. China last adopted an 'appropriately loose' monetary policy after the 2008 global financial crisis before switching to 'prudent' in late 2010.

The offshore yuan held steady after the reports. In Europe, the ECB, SNB, and BOC are all expected to ease this week— the only live question for each one being whether it will be a jumbo 50bps or not. The euro and Canadian dollar were a touch firmer to start the week, while the Swiss franc was steady.

However, the slightly softer U.S. dollar owes as much to two weeks of ebbing U.S. Treasury yields, confounding many post-election forecasts of restive sovereign bond markets. Analysts cite that economic weakness overseas and accelerated monetary easing around the world make U.S. Treasuries look like high-yielding bonds among a basket of global 'safe assets', drawing demand despite the relatively robust state of the U.S. economy.

German and Chinese 10-year sovereign bonds are now yielding more than 200bps less than U.S. Treasury equivalents, with Italy yielding 100bps below them, France 150bps, and Japan some 300bps.

Elsewhere, euro group finance ministers meet in Brussels on their tricky annual budget drafts— especially the French impasse. Curiously, British finance minister Rachel Reeves will also be in attendance as Britain's Labour government pushes to reset ties with the European Union since coming to power in July and improve trading relations to boost growth. Sterling was firmer against the dollar and the euro on Monday morning.

Key developments that should provide more direction to U.S. markets later on Monday:

• New York Federal Reserve's survey of consumer inflation expectations.
• U.S. November employment trends report, October wholesale sales.
• U.S. corporate earnings: Oracle (NYSE:ORCL).
• Euro group finance ministers meet in Brussels on draft budget plans, with ECB board member Piero Cipollone and British finance minister Rachel Reeves in attendance.
• Bank of England Deputy Governor Dave Ramsden.
• G20 finance sherpas meeting in Johannesburg.

(By Mike Dolan, [email protected])