30/11/2024 Market Analysis

Week Ahead: Jobs & ISM Data, Indicators of Resilience

As investors turn their focus back to U.S. economic data, critical indicators like November’s jobs report and ISM surveys will provide insights into the resilience of the U.S. economy. In Asia, attention is centred on purchasing managers’ surveys and inflation data, given concerns over how U.S. policies could influence inflation trends and supply chains.

Recent trends have shown stalled momentum in rising rates and equities, with the dollar remaining robust. The implications of the Republican election sweep are under scrutiny, particularly concerning potential global tariff regimes. While proposed tariffs of 60% on China and 10-20% on other countries are debated, the interconnectedness of global trade may limit their feasibility. For instance, the U.S. heavily relies on China for critical imports like rare earth metals and pharmaceuticals, highlighting vulnerabilities in domestic supply chains.

U.S. monetary policy remains a focal point. After signalling a loosening of restrictive measures, the Federal Reserve implemented a 50-basis-point rate cut, which was followed by improving nonfarm payroll data. However, the market is recalibrating expectations, with a shift from predicting 200 basis points of rate cuts by 2025 to a more tempered outlook of 65 basis points in 2024. U.S. Treasury yields, particularly the two-year and 10-year notes, have reflected these shifting expectations, influenced by rising inflation expectations and changes in Fed funds rate projections.

Although earlier tax cuts and tariffs were not notably inflationary, recent inflationary pressures may ease in 2025. U.S. growth has remained above trend since mid-2022, outperforming other major economies. Meanwhile, the eurozone faces challenges from higher energy costs, geopolitical tensions, and structural economic weaknesses.

Heightened geopolitical risks are adding to economic uncertainty. The Biden administration, alongside the UK, has authorized Ukraine to use advanced missile systems against Russia, escalating tensions. Russia has responded aggressively, revising its nuclear doctrine and signalling potential threats to the UK. China’s support for Russia, coupled with its increased military activities in the Pacific, is raising concerns about regional stability, particularly around Taiwan and Japan.

Political instability in Europe is compounding economic challenges. Germany faces an imminent vote of no confidence, with the likelihood of a CDU-led government emerging. In France, a summer snap election produced a fragile government, while bond yields signal growing fiscal risks. Japan’s governing coalition has lost its majority, resulting in a minority government focused on immediate fiscal measures to stabilize its position.

This interconnected landscape of economic and geopolitical developments underscores the delicate balance investors and policymakers must navigate in the months ahead.

United States of America

U.S. Growth Could Limit Rate Cuts

Stronger U.S. economic performance compared to other regions may reduce the likelihood of interest rate cuts in the near term. This could boost both the U.S. dollar and Treasury yields, as robust data supports a resilient economy.

Market Expectations for December

Money markets currently estimate a 65% chance of a Federal Reserve rate cut in December. However, this probability could shift depending on upcoming economic data. Weak indicators may increase the odds, while stronger results could diminish them.

Focus on the November Jobs Report

The November jobs report, due Friday, December 6, is the centrepiece of the week. Analysts expect a modest rise in nonfarm payrolls, despite potential distortions caused by earlier hurricanes and strikes. Other labour metrics, including JOLTS job openings on Tuesday, ADP private payrolls on Wednesday, and weekly jobless claims on Thursday, will offer additional context.

Broader Economic Indicators in View

Key U.S. economic data includes ISM manufacturing activity on Monday, ISM services data on Wednesday, October factory orders on Wednesday, and trade figures on Thursday. These indicators will provide insight into the overall health of the economy, especially against the backdrop of weaker eurozone surveys.

Market Reaction to Republican Policies

The Republican election sweep has bolstered both the dollar and equities. While some Trump administration appointments drew criticism, markets welcomed the economic team’s focus on spending and tax cuts rather than aggressive tariffs. This sentiment, combined with stable inflation and labour data, has tempered expectations for Federal Reserve rate cuts.

Dollar Index and Market Trends

The Dollar Index has surged 6% since September, hitting levels above 108.00 for the first time in two years. A further rise to 109.00 is possible, but momentum indicators suggest a pullback toward 105.50 may occur in the short term.

Key Points:

• Strong U.S. data could reduce the chances of rate cuts.
• November jobs data and broader economic indicators are critical this week.
• Republican policies are supporting market confidence.
• The U.S. dollar shows strength but may consolidate temporarily.

Australia & New Zealand

Spotlight on Australian Economic Data

Australia’s October retail sales data, due Monday, and Q3 economic growth figures on Wednesday will dominate bond traders’ attention. Consumer spending remains under scrutiny, as a resurgence could dampen the Reserve Bank of Australia’s (RBA) chances of cutting rates soon.

RBA’s Outlook on Consumer Behavior

The RBA anticipates a gradual increase in consumer spending, supported by mid-year tax cuts and a robust job market. However, excessive demand could trigger concerns of overheating, complicating monetary policy decisions.

Improving Economic Growth

Wednesday’s GDP figures are expected to show slight improvement, pulling Australia further from recession territory. Despite this, overall growth remains weak, and traders are adjusting their rate-cut expectations.

Shifting Rate Cut Expectations

Three of the four major banks in Australia now expect the RBA to delay its next rate cut until May, with only the Commonwealth Bank holding onto February. A shift in the latter’s forecast could impact bond yields further.

Australian Dollar Trends

The Australian dollar stabilized in November after a 4.8% drop in October, its worst monthly decline in two years. It gained 2.2% in early November, peaking near $0.6700 before retreating to $0.6440 mid-month. Volatility around U.S. tariff threats added downward pressure.

RBA’s Hawkish Approach

Under Governor Bullock, the RBA has taken a hawkish stance, convincing markets to abandon hopes of a rate cut this year. The first cut is now priced for Q2 2025, reflecting the central bank’s cautious tightening strategy.

Contrasting New Zealand’s Strategy

In contrast, the Reserve Bank of New Zealand (RBNZ) has aggressively raised rates, reaching a peak of 5.50% in 2023, before cutting to 4.25% in three rapid moves. Another 50-basis-point cut is expected in February. Despite recent volatility, the Australian dollar has outperformed its New Zealand counterpart by nearly 2% year-to-date.

Key Points:

• Retail sales and GDP data will shape market expectations for the RBA’s next move.
• Consumer spending remains a pivotal factor for monetary policy.
• The Australian dollar shows signs of stabilization after significant declines.
• RBA’s hawkish stance contrasts with RBNZ’s aggressive easing, highlighting diverging monetary approaches.

Canada

Spotlight on Canadian Jobs Data

Canada’s November jobs report, due Friday, will be a critical data release following weak Q3 GDP figures that raised expectations of another significant interest rate cut by the Bank of Canada (BoC). Trade data for October, arriving Thursday, will also provide insights into the economy’s health.

Interest Rate Cut Possibilities

The BoC’s next decision on December 11 looms large, with markets pricing in roughly a 50% chance of a 50-basis-point rate cut. The weak economic data has kept the possibility alive, as the central bank may act decisively to counter economic headwinds.

U.S. Dollar and Canadian Dollar Dynamics

The U.S. dollar pared its post-election gains against the Canadian dollar after peaking at CAD1.4180 on November 15, its highest since the pandemic. This surge was driven by U.S. tariff threats, which added pressure on the Canadian economy.

Impact of U.S. Tariff Threats

President Trump’s late November threat of a 25% tariff on Canadian imports sent ripples through markets. While widely regarded as a negotiation tactic, the potential economic damage to Canada, which exports nearly 20% of its GDP to the U.S., sparked concerns of prolonged volatility.

U.S.-Canada Interest Rate Spread

The premium on U.S. two-year yields over Canadian counterparts hit a 27-year high of 118 basis points in November, reflecting diverging economic outlooks. Although it narrowed to below 100 basis points, it ended the month near 107, underscoring Canada’s economic struggles.

Trade Ties and Economic Uncertainty

Despite the uncertainty injected by tariff threats, Canada’s historical alignment with U.S. trade policies suggests a willingness to strike a deal. Extensive cross-border energy and production ties underscore the interdependence of the two economies.

Key Points:

• November jobs data and October trade figures are key indicators ahead of the BoC’s December decision.
• Markets remain divided on the likelihood of a 50-basis-point rate cut.
• U.S. tariff threats highlight economic vulnerabilities and add to market uncertainty.
• The Canadian dollar faces heightened volatility amid trade and policy concerns.
• The U.S.-Canada rate spread reflects broader economic challenges facing Canada.

China

Key Economic Data from China

China enters another subdued data week, with private indicators of factory and service-sector activity drawing the most attention. Economists will analyze the Caixin Manufacturing PMI for November to gauge if Beijing’s economic stimulus is fostering tangible improvements in manufacturing.

Manufacturing Sentiment and Tariff Concerns

The Caixin manufacturing index will also be scrutinized for signs of manufacturer unease over potential tariffs, particularly after President-elect Trump reiterated plans for additional levies on Chinese goods. This adds a layer of uncertainty for export-driven sectors.

Services Sector Strength

The Caixin Services PMI is anticipated to maintain its strong performance after last month’s robust reading supported Chinese equities. Continued positive momentum could solidify views of stabilization within the services sector.

Stimulus and Structural Issues

Despite disappointment over limited efforts to directly revive consumer demand, a synchronized positive signal from both the Caixin and official PMIs (due on Saturday, Nov. 30) could strengthen optimism about “green shoots” in the economy.

Yuan’s Performance Against the Dollar

The U.S. dollar staged a remarkable comeback against the Chinese yuan in Q4, rising 1.75% in November to touch nearly CNY7.26—its highest since July. This reversed Q3’s 3.4% dollar decline. The PBOC’s recent moves to set lower-than-expected reference rates hint at efforts to limit the yuan’s appreciation amid market fluctuations.

Market Skepticism on Stimulus Measures

Investors remain unconvinced by Beijing’s measures to bolster property, equity markets, and local government finances. Lingering doubts may temper enthusiasm for the yuan and Chinese equities.

Geopolitical and Trade Dynamics

New export restrictions on critical materials like tungsten and graphite, combined with Trump’s hawkish trade appointments, suggest increasing pressure on China’s trade and economic strategies.

Yuan-Yen Correlation

The rolling 30-day correlation between changes in the offshore yuan and Japanese yen hit a three-month high near 0.70, signalling a renewed interconnectedness between these major currencies.

Key Points:

• Focus on Caixin PMIs for signs of stimulus-driven economic improvements.
• Tariff uncertainty looms large for Chinese manufacturers.
• Services sector performance remains a bright spot for the economy.
• The yuan faces renewed pressure as the dollar continues its rally.
• Market scepticism persists despite Beijing’s announced economic measures.
• Export restrictions and geopolitical shifts add layers of complexity to China’s trade outlook.

Europe

December’s Data Flow in the Eurozone

As December begins, economic activity in the eurozone will receive less scrutiny due to a light data calendar. Key updates include final manufacturing PMIs on Monday and services PMIs on Wednesday, which could reveal adjustments to November’s dismal flash estimates.

Germany’s Struggles in Focus

Germany’s October manufacturing orders (Thursday) and industrial production (Friday) will likely show mixed outcomes. HSBC analysts emphasize the ongoing structural challenges faced by German industries, which struggle to adapt to evolving global conditions.

Industrial Production Across the Region

France will release October industrial production figures on Thursday, adding to the picture of eurozone-wide economic stagnation.

ECB Meeting Guidance

European Central Bank President Christine Lagarde is scheduled to address the Committee on Economic and Monetary Affairs on Wednesday. Investors will look for insights ahead of the ECB’s December 12 rate decision. Although most expect a 25-basis-point cut, lingering weakness in the economy could open the door to a larger reduction.

Eurozone Inflation and GDP

Eurozone producer price data (Wednesday) and final third-quarter GDP figures (Friday, Dec. 6) will add detail to the region’s economic challenges, particularly with inflation pressures persisting alongside weak growth.

Government Bond Issuance

Germany will auction €4.5 billion of Schatz bonds on Tuesday and €3.5 billion of Bunds on Wednesday, while Spain and France will hold auctions on Thursday.

Mounting Eurozone Challenges

The eurozone’s economic fragility continues to deepen:

• Economic Weakness: Germany, the bloc’s largest economy, has failed to achieve consecutive quarterly growth in over two years.
• Geopolitical Strain: Rising energy costs due to early winter conditions and geopolitical tensions with Russia add to economic stress. Gas prices have doubled since February.
• US Tariff Threats: Proposed US tariffs could disproportionately impact Germany and Italy, the eurozone’s largest exporters to the US.

Political Instability in Germany and France

Economic stress has overwhelmed governments in Germany and France:

• Germany: The coalition government is expected to lose a confidence vote in mid-December, triggering national elections in February. The CDU is poised to lead the next administration.
• France: Efforts to push through the 2025 budget via constitutional measures could backfire, possibly leading to a government collapse.

Euro Under Pressure

The euro hit $1.0335 in late November, its lowest since late 2022, as economic and political challenges eroded confidence. It remains well above its 2022 low of $0.9535 but faces persistent downward pressure.

Key Points:

• PMIs and inflation data will provide limited optimism for eurozone recovery.
• Structural challenges continue to weigh heavily on German industry.
• Political turmoil in Germany and France compounds economic difficulties.
• Rising gas prices and proposed US tariffs create further economic headwinds.
• The euro remains vulnerable as the region grapples with mounting challenges.

Japan

Bank of Japan Policy

The upcoming week in Japan offers insights into monetary policy, government bond auctions, and consumer demand, all against a backdrop of shifting political and economic dynamics.

BOJ Signals: Nakamura’s Speech

Bank of Japan Policy Board member Toyoaki Nakamura is scheduled to address business leaders in Hiroshima on Thursday. While Nakamura is viewed as dovish, any indication of support for a December rate hike would strongly signal a shift in the BOJ’s stance. However, analysts, such as Citi Research’s Katsuhiko Aiba, find this unlikely before critical U.S. non-farm payrolls data on December 6.

Key Economic Data

Japan will release October household spending data on Friday, December 6. Economists expect a 2.6% year-over-year decline, attributing weakness to warm autumn weather that dampened sales of seasonal clothing.

Government Bond Auctions

The Ministry of Finance will auction:

• 10-year Japanese government bonds: ¥2.6 trillion on Tuesday.
• 30-year JGBs: ¥900 billion on Thursday (a reopening of the October 2024 issue).

Political and Fiscal Context

Prime Minister Ishida now leads a minority government after his coalition lost its majority in a snap election. However, with support from the Democratic Party for the People (DPP), a ¥13.9 trillion supplemental budget is set to proceed, including:

• Household subsidies for electricity, gas, and gasoline.
• A raised tax-free income threshold, reflecting DPP priorities.

Currency and Market Dynamics

• Yen and Dollar Movements: The U.S. dollar reached ¥156.75 in mid-November, a four-month high, driven by rising U.S. rates. However, subsequent pullbacks in U.S. 10-year Treasury yields (30 basis points below their November peak of 4.50%) have tempered the dollar’s strength.
• Support Levels: A break below ¥149 could prompt a move toward ¥147.40, aligning with shifts in U.S. yields.

BOJ Policy Outlook

The Bank of Japan is signalling a gradual move toward policy normalization, with the swaps market pricing in 15 basis points of tightening at its December 19 meeting.

Key Points:

• Nakamura’s speech may offer clues on the BOJ’s December policy direction.
• Fiscal measures aim to boost household spending amid weak consumer demand.
• Currency and bond market dynamics remain closely tied to U.S. rate movements.
• Political shifts have not derailed fiscal support but could influence longer-term policymaking.

Switzerland

Switzerland's inflation figures for November are due Tuesday.

United Kingdom

Data and Auctions in Focus

The UK’s economic calendar for the upcoming week is light, with the spotlight on purchasing managers’ index (PMI) releases, housing data, and gilt auctions. Sterling’s recent recovery and evolving inflationary trends also draw attention as traders anticipate the Bank of England’s next moves.

Key Data Releases

1. PMI Figures:

• Manufacturing PMI: Final November data will be released on Monday, providing insights into the sector’s activity.
• Services PMI: Due Wednesday, with expectations for confirmation of sector performance after a weak flash reading for November showed contraction.

2. Nationwide House Price Index:

• Scheduled for release on Monday, this index will shed light on housing market trends for November.

Gilt Auctions

• July 2054 Gilt: Auctioned on Tuesday.
• October 2031 Gilt: Auctioned on Wednesday.

Sterling and Market Dynamics

• Currency Movements: Sterling experienced a volatile November, dropping below $1.25 for the first time in six months before recovering to around $1.2750 by month-end. A sharper-than-expected decline in October retail sales and weak flash November PMI data initially pressured the pound, but a broader dollar pullback supported its rebound.
• Yields: Gilt yields mirrored movements in US Treasuries. The UK 10-year yield, which peaked near 4.60% in early November, eased to around 4.25% by month-end, reflecting weaker economic data and global bond market trends.

Bank of England Outlook

The Bank of England (BOE) meets on December 19, one day after the release of November CPI data. A year-over-year inflation increase is likely due to a favourable base effect from November 2023’s CPI decline.

• December Expectations: While no rate cut is anticipated at this meeting, markets are pricing in a potential cut at the first BOE meeting in 2025 (February 6).
• Inflation Trends: Current price pressures are expected to ease after January, aligning with BOE forecasts.

US-UK Relations and Trade

There is optimism that a renewed “special relationship” with the incoming US administration could pave the way for a bilateral trade agreement. This would bolster sentiment for UK markets and potentially support sterling in the medium term.

Key Points:

• A quiet data week in the UK leaves markets likely to follow cues from the US.
• Sterling’s recovery remains fragile amid weak domestic data and shifting global conditions.
• Gilt auctions will provide additional insights into market demand and yield trends.
• Inflation data and BOE policy direction remain central to the UK’s economic narrative as 2024 draws to a close.