A really big unknown is how the stock market will fare

Outlook

Yesterday the ADP payrolls and good services PMI brought into question whether the US needs another rate cut in December. Then this morning the Challenger layoff data was very, very scary and because based on real developments and management priorities, a validation that the economy could use a boost.

Another rate cut doesn’t help with uncertainty except at the margin. Andy Challenger told the press “Some industries are correcting after the hiring boom of the pandemic, but this comes as AI adoption, softening consumer and corporate spending, and rising costs drive belt-tightening and hiring freezes.”

See the chart. Job cuts so far this year are over 1 million, the most since the pandemic. “In the same period, US-based employers have announced the fewest hiring plans since 2011. Seasonal hiring plans through October are the lowest since Challenger started tracking them in 2012.”

To the extent the dollar’s recent gains are down to robustness and resilience, this is a kick in the teeth. We rather like Mr. Challenger’s three factors: AI, softening consumer and corporate spending, and rising costs.

To that we would add the overhanging miasma of uncertainty. Uncertainty about what reckless and destructive nonsense Trump will do next. We already have the longest government shutdown in history plus now a 10% cut in air travel. The Tuesday elections plus the high unfavorability ratings for Trump can be a prod for the next outrage.

A really big unknown is how the stock market will fare. Big tech is overvalued up the wazoo. But that doesn’t necessarily mean a burst bubble. It may mean a slow leak.

The market expects that Dec rate cut and normally that would be a dollar-negative, but not if the market then sees the cut as appropriately addressing economic weakness, especially jobs. We doubt another rate cut does anything to improve the labor market, but never mind. 

Added all up, and in the absence of hard data on inflation, we guess the rising yields, robust economy plus the still-firm stock market will overcome all those negatives. It’s not a cliff-edge, but it may be a black hole horizon. 

Forecast

We have more than one currency reaching the B band or linreg channel bottom, or going over it, and then bouncing up a bit. This includes the Swiss franc and yen. Just a natural response to being oversold, or the start of something? It’s hard to say the start of a correction when the 10-year rose strongly and the stock market recovered with unseemly haste.

The factors are minestrone soup. We have the economy okay (Atlanta Fed GDPNow, services PMI, ADP jobs) and we have the economy heading downhill (Challenger jobs losses, Fed expected to cut in Dec). We have the stock market recovering really, really fast after a scare, but then overnight we have decent earnings from a tech (Oracle) and the stock falling anyway. We have Trump’s favorability down under 40% and every blessed election this week going to the Dems, but no pushback from the White House—yet.

Much as we hate to say it, the dollar looks like resuming gains. That’s if the stock market resists freaking out and if Trump keeps his trap shut for a while. The current move is likely a temporary blip and not the start of yet another correction.

Tidbit: If the Fed is dovish (no matter what Powell said) and will be cutting in Q1 if not in December, and if the BoJ finally does raise rates, the contracting differential “should” favor the yen. But as noted before, logic doesn’t always rule.

Tidbit: Reuter’s Dolan has a riff on whether AI is causing a bubble that can burst or is a lasting breakthrough. Well, it’s both.

The problem lies in how long it takes the market to recover once a bubble is burst. Dolan notes it took 15 years for the dotcom bubble to deliver profits after breaking. He has some more cases, too. 

Fun Tidbit: Reuters hits back at the idea gold is due for a fall. As the title says, the recent rally is not such a big deal. “The rally over the past three years looks impressive, but pales in comparison to the 518% jump between July 1976 and February 1980 and the 643% gain between February 2001 and September 2011. Both of these extended rallies were followed by a long downtrend, but the losses were nowhere near enough to wipe out the gains.”

“In historical percentage terms it is not actually that large, despite the massive increase in the U.S.-dollar price. This doesn't necessarily mean the rally will extend for several more years, but it does mean that if it does, it would not be unprecedented.

“Gold's history also shows that when rallies do end, prices tend to drop back and then trade sideways for an extended period. The final thing worth noting is that analysts have usually found it quite difficult to predict when an inflection point is being reached, and the current situation is little different to past experiences.”

So, the madness of crowds or something more serious? We rather like the ending: “But the ongoing concerns over the U.S. fiscal deficits and the threat to the independence of the Federal Reserve posed by Trump's seeming determination to control monetary policy are likely to be enough to keep gold firmly on investors' radar.”

We say the market can easily brush off the fiscal situation as it always does, but that Fed issue is a market-stopper.

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