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

By Mike Dolan

Faced with another monthly round of stubborn inflation and uncertainty about fiscal, tariff, and immigration policy ahead, the Federal Reserve is becoming more cautious about the extent of future policy easing.

Fed boss Jerome Powell didn't reveal much in a keenly-watched speech on Thursday but emphasized the central bank still sees a robust economy and has significant new data to consider before deciding how much to lower interest rates further.

> "The economy is not sending any signals that we need to be in a hurry to lower rates," Powell stated at a Dallas Fed event.

With just 18 months remaining in his term, Powell appeared eager to avoid questions regarding the policy decisions of Donald Trump’s incoming administration, which was bolstered by a Republican clean sweep of Congress.

> "We can do the arithmetic," Powell said concerning possible tariff hikes on imports and immigration curbs, adding, "This is getting me into political issues that I really want to stay as far away from as I possibly can."

In light of a hotter-than-expected producer price report for October and a drop in weekly jobless claims, interest rate markets are reducing expectations for Fed easing. Retail and industrial numbers for October are expected soon.

Futures now suggest a 60% chance the Fed will cut rates again next month, with fewer than three quarter-point cuts fully priced in over the next year. Some economists believe Fed rates may not drop below 4% in this cycle.

Both the 12-month Treasury bill rate and the two-year note yield hover just under 4.4%, with the 10-year benchmark near five-month highs of about 4.45%. Two-year market inflation expectations have settled around 2.5%, above the Fed's 2% target. With elevated cash rates, money market fund assets continue to grow, surpassing records with assets under management jumping over $100 billion in the past week to $6.67 trillion.

Wall Street stocks halted their post-election surge, with the dollar retreating for the first time since the election results were announced. Attention turned to other major economies amid fears of a global trade war.

China's economic updates revealed mixed industrial readings and positive retail growth. However, concerns about potential U.S. tariff hikes, disappointing recent stimulus details, and ongoing worries about the property sector led to a decline in Chinese stocks.

Chinese annual house price deflation deepened in October to 5.9%, marking the largest drop since 2015, while property investment fell 10.3% in early 2024 compared with 10.1% from January to September. The CSI300 stock index dropped nearly 2% on Friday, completing its worst week since July, primarily due to declines in the real estate sector. Hong Kong's Hang Seng index recorded a sixth consecutive day of losses.

The offshore yuan gained against a retreating dollar as the 10-year yield premium on U.S. Treasuries over Chinese equivalents steadied at its widest since May. The dollar also weakened against Japan's yen, amid concerns that excessive yen weakness might provoke Bank of Japan intervention, especially after the latest Japanese GDP surpassed forecasts.

With a key BoJ press conference approaching, Finance Minister Katsunobu Kato indicated that authorities would act against sharp exchange-rate fluctuations. Despite a decrease in U.S. inventories, crude oil prices fell due to a dim global demand outlook.

Britain's economy contracted unexpectedly in September, with growth slowing in the third quarter, posing an early challenge for Finance Minister Rachel Reeves’ growth initiatives.

In the eurozone, Germany’s economic outlook remains concerning. While the European Commission projected a 0.8% expansion for the euro area, it revised Germany's estimate down to predict a 0.1% contraction. European Central Bank board member Isabel Schnabel suggested the ECB should prioritize interest rates as a policy tool while using extraordinary measures sparingly.

In company news, Walt Disney (NYSE:DIS) shares rallied 6% after beating quarterly earnings expectations and providing robust guidance. Conversely, Tesla (NASDAQ:TSLA) shares fell by 5.8%, and Rivian Automotive (NASDAQ:RIVN) dropped by 14.3% after reports surfaced about Trump's transition team potentially eliminating the $7,500 consumer tax credit for electric vehicle purchases.

In Europe, vaccine companies faced pressure after Trump selected Robert F. Kennedy Jr., who has propagated misinformation about vaccines, to lead the Department of Health and Human Services.

Overall, Wall Street stock futures were negative ahead of Friday's opening. Popular 'Trump trades,' including Bitcoin, showed some firmness but remained below this week's highs, with the leading cryptocurrency falling back under the $90,000 mark.

Key developments to watch for U.S. markets later on Friday:
– U.S. October retail sales, industrial production, import/export prices, New York Federal Reserve's November manufacturing survey, September business/retail inventories
– Speeches from New York Fed President John Williams and Boston Fed Chief Susan Collins; remarks from European Central Bank Chief Economist Philip Lane
– U.S. corporate earnings: Sysco (NYSE:SYY), Progressive.