Some mornings there’s nothing of note
Upon which this poet can dote
The news cycle’s turned
To what folks have learned
While still up in arms o’er the vote
 
So, data last night and this week
Is not very likely to wreak
Much havoc on prices
Unless there’s a crisis
That starts from a policy tweak

 

On the macroeconomic front, there has been very little new news to discuss since I last wrote.  Friday’s Retail Sales data was a bit stronger at the headline level, and there was also a revision higher to the previous month, although the ex-autos number was soft.  Perhaps more impressive though, was the Empire State Manufacturing Index which jumped from -11.90 to +31.20, the highest reading since December 2021 and the biggest one-month jump on record.  It appears there is some excitement about the election results.  But all that was Friday, and markets have priced it in.  Since then, crickets.

Which takes us to the story that seems to be getting more press than anything else, although it seems only tangentially related to how markets may behave, at least so far.  This is the news that President Biden has given permission for Ukraine to use long-range missiles supplied by the US and Europe to attack Russia directly.  Now, I am not a geopolitical analyst, but this seems unusual on two counts.  First, given President Biden is the dictionary definition of a lame duck, it is hard to understand the perceived benefit of this move, especially given that President-elect Trump has been quite clear in his goal to end the war, or at the very least the US activities there. And second, what possible good can come from raising the specter of increased hostilities with a nuclear power?  

Beyond the very obvious reasons that we all should care about this as nobody wants a nuclear conflagration, it has been interesting to observe the market response to this news.  We ought not be surprised that safe havens have rallied which helps explain the rebound in gold (+1.1%) and silver (+1.6%) this morning.  As well, oil (+0.5%) and NatGas (+1.8%) seem to be benefitting as a serious increase in fighting there could well have a negative impact on production.  While many had been focused on the Middle East being the likely hot spot for an oil production halt, perhaps this will surprise folks.

Perhaps it is also no surprise that the dollar is holding its own this morning, slightly higher vs. most G10 currencies with the yen (-0.5%) the laggard.  In one way, that is unusual as the yen is typically seen as a haven in its own right, but last night, BOJ Governor Ueda spoke and said the following, “The actual timing of the adjustments [rate hikes] will continue to depend on developments in economic activity and prices as well as financial conditions going forward.  Gradually adjusting the degree of accommodation in line with improvement in economic activity and prices will support long-term economic growth and contribute to achieving the price stability target in a sustainable and stable manner.”  In other words, while rate hikes may be necessary, it is still too soon to determine if that is the appropriate policy going forward and what the timing may be.  Meanwhile, in the EMG bloc, only ZAR (+0.5%) is bucking the trend of dollar strength and that seems to be based on the rebound in precious metals prices.

Finishing up with other markets, bond yields are climbing higher across the board, with Treasury yields higher by 3bps and European sovereign yields rising between 4bps and 7bps as concerns grow that central bank policy is out of step with the potential inflation outcomes.  Consider that, other than the BOJ, the rest of the G10 are cutting interest rates and inflation’s decline appears to be abating everywhere.  In that situation, it should be no surprise that investors are demanding higher yields to own sovereign debt.  But honestly, it is very hard to link today’s price action here to the change in Ukraine policy.

Finally, equity markets are confused mixed.  Friday’s US selloff was followed in Japan (-1.1%) despite the yen’s weakness which generally helps equities there.  Hong Kong (+0.75%) managed a gain although mainland shares (-0.5%) continue to leak oil.  There is a story that the government in China will allow some regions to bring forward that debt swap to get things started sooner, but the more widely read story is that the Chinese population is set to shrink by >50 million by the end of the decade, an unenviable situation in which President Xi finds himself.  After all, inward migration to China is non-existent.  European bourses are mostly softer, but only modestly so (DAC -0.2%, CAC -0.2%, IBEX -0.1%) as investors await the ongoing news from the US and the presidential transition.  ECB speakers have begun to harp on the issue of primary budget deficits across the Eurozone and how that will impair growth opportunities going forward, although will not dampen inflation.  As to US futures, at this hour (7:30) they are basically unchanged.

The fact there was limited data overnight was a harbinger of the upcoming week, where there is also limited data.

Tuesday	Housing Starts	1.34M
	Building Permits	1.43M
Thursday	Initial Claims	223K
	Continuing Claims	1875K
	Philly Fed	8.0
	Existing Home Sales	3.93M
Friday	Flash Manufacturing PMI	48.8
	Flash Services PMI	55.3
	Michigan Sentiment	73.5

Source: tradingeconomics.com

Interestingly, it appears that the Fed has started their Thanksgiving break early as there are only three speeches slated, and Chicago Fed president Austan Goolsbee is making two of them.  However, Powell’s comments on Thursday about no hurry remain the market’s guiding light for the time being.  Futures markets are continuing to price about a 62% probability of a cut next month and are only pricing a total of 75bps of cuts by the end of 2025.  Once again, if you want to understand the dollar’s resilience, look no further than this situation.

For now, I expect that every announcement by Trump regarding cabinet positions, especially the Treasury role, is going to be of far more significance than any of the economic data set to be released.  Perhaps the only other noteworthy thing this week is Nvidia is due to report earnings Wednesday after the close, and of course, that will get pulses quickening.

Nothing has changed my long-term view that the dollar remains best placed to perform well.  Here’s hoping that there is no nuclear war!

Good luck

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