Our financial markets are gripped in a frenzy of optimism. Ratcheting up expectations of a Federal Reserve rate cut come December are a string of dovish speeches from Fed insiders. The probability of a 25 bp cut now has leapt to 78%. This is a huge jump from just 30% a week ago, as investors digest the evolving economic picture and the Fed’s response.
New York Fed President John Williams pointed out that the stance of the policy is “moderately restrictive.” He noted that there is a way to go in raising interest rates and pushing them towards a neutral level. His comments seem to fit perfectly with the overall market’s idea that the first rate cut is coming sooner than later. In short: If Fed officials are looking for justification to cut rates soon, it’s hard to see how this is it. From the perspective of growth, recent economic indicators have them spooked.
Putting an exclamation point on this narrative, it looks like the September payrolls figure will be revised down. Especially concentrated hiring trends, Williams added, which he called “not a good sign.” This further supports the notion that the labor market isn’t really as hot as we once thought. Though this assessment was bad news, it has only intensified the speculation around the need for dramatic policy changes.
The market is understandably jittery as it waits for key economic data releases to drop. Among these are the closely watched US Producer Price Index (PPI) for September and retail sales figures due out Tuesday. The November Consumer Price Index (CPI) data will be released shortly after the FOMC meeting on December 9-10. This timing leaves the Fed with little information about inflation and labor market conditions by the time they make their decision.
The CME FedWatch Tool proves these changing sentiments, monitoring market expectations for rate cuts. The rapid increase in anticipated cuts indicates a significant change in market outlook, prompting traders to closely monitor upcoming economic indicators for further guidance.
In Canada, the economic calendar remains very thin through Friday. On the flip side, all eyes will be on September’s Gross Domestic Product (GDP) release as well as Q3 GDP figures. As of this writing, the USD/CAD is trading in the 1.4112 area, holding on to near two-week highs after last week’s surge. Particularly for the Canadian dollar, it is reacting to significant domestic and U.S. economic signals, which are driving currency movements.
Fed Governor Christopher Waller addressed concerns regarding the current economic situation, stating that issues in the labor market are “not a big problem.” His comments are in line with the cautiously optimistic outlook expressed by other Fed officials recently about the state of the economy.
With investors on the edge of their seats in anticipation of the next data releases and shifts in monetary policy, the financial landscape is as dynamic as ever. We’ll be keeping a close eye on how these indicators will influence the Federal Reserve’s thinking in December and going forward.