Morning bid: Holiday-bound US turns focus to inflation, France tense

11/27/2024

3 minutes read

2024.11.27 06:37

A look at the day ahead in U.S. and global markets from Mike Dolan

With Wall Street about to log off for what’s effectively a four-day Thanksgiving holiday, trade tariff jitters are replaced by inflation angst as the Federal Reserve gets another price check.

Although big automakers took a hit, broad U.S. stock indexes seemed unperturbed on Tuesday by President-elect Donald Trump’s threat of 25% tariffs on imports from Canada, Mexico and China. The main heat was in the Mexican peso, Canadian dollar and their related bourses – while stocks in Europe, Japan and South Korea wobbled again.

But the gained more than half a percentage point through the session, closing back above 6,000 at another record high. Futures were back off marginally ahead of today’s bell.

With trading thinning this week, stocks are still feeding off assumptions about the extent of Trump’s agenda of tax cuts, tariff rises and immigration crackdowns. Surveys showing a jump in consumer confidence this month helped.

There’s also been some relief this week from a calming of the Treasury market, with yields retreating in a week of big debt sales – due to mix of optimism about money manager Scott Bessent’s nomination as Treasury Secretary and an ebbing price following the Israel-Hezbollah ceasefire.

Minutes from the Fed’s post-election meeting this month showed policymakers divided over how much further they may need to cut interest rates from here, avoiding much guidance on the forward trajectory.

Part of the Fed’s problem is visibility over the impact of Trump’s economic plans.

Goldman Sachs’ ‘ready reckoner’, for example, shows a 25% tariff on U.S. imports from Canada, Mexico and China – more than 43% of all U.S. imports – would generate government revenue of about 1% of GDP. But, by lifting the effective U.S. tariff rate by 8.6%, it would boost the core PCE price index by 0.9%.

Wednesday gets two cuts of that personal consumption expenditures inflation gauge – along with third quarter GDP revisions and the monthly update from October.

The latter is expected to show annual headline and core PCE inflation gauges – the Fed’s favored measures – ticking back up to 2.3% and 2.8% respectively.

And yet Treasury yields continued to retreat ahead of those releases, falling back to levels seen just after the November election. Even market inflation expectations, captured by 10-year inflation swaps or ‘breakeven’ rates in inflation-protected Treasuries, are ebbing too.

Some of the optimism in Treasuries may have come from indications in the Fed minutes that some policymakers believe it may soon be time to lower the interest rate on funds that banks and money market funds park at the Fed – so that it once again matches the bottom of the Fed’s policy rate range.

The so-called overnight reverse repurchase agreement rate, one of two technical lending rates the Fed uses to ensure the federal funds rate stays within its monetary policy target range, is currently set at 4.55%, while the policy rate range is 4.5% to 4.75%.

The fallback in U.S. yields also took the steam out of the dollar, whose main index slipped back further from Friday’s two-year highs and skidded sharply against Japan’s yen, which was last up 1.2%.

Some of the moves were exaggerated by the holidays stateside and end-of-month positioning.

There was a mixed picture in overseas markets. Europe’s stocks continue to fall on everything from the trade war worries to France’s political impasse over its budget.

European auto stocks slid for a second day on world trade jitters.

French stocks and bonds were hit hard, driving the premium the government pays for long-term borrowing to its highest since the euro zone debt crisis of 2012, as investors grow uneasy over the fate of the new government and its budget.

Prime Minister Michel Barnier told French broadcaster TF1 on Tuesday that France could face fiscal turmoil if his government falls. Far-right leader Marine Le Pen has been threatening to topple France’s coalition government in a no-confidence vote, over a disagreement with Barnier over the proposed budget, which contains measures to cut spending and raise taxes.

Among French lenders, Societe Generale (OTC:) and BNP Paribas (OTC:) fell around 2% each.

Elsewhere, China and Hong Kong stocks outperformed as data showed a less sharp decline in industrial profits, while traders placed bets Beijing will roll out more supportive policies to counter the risks of U.S. tariffs.

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

* US October personal income and expenditure and PCE inflation gauge, Oct durable goods orders, Oct trade balance, Oct pending home sales, weekly jobless claims, Q3 GDP revision and corporate profits and PCE price deflator, Oct retail/wholesale inventories

* European Central Bank chief economist Philip Lane speaks