On Tuesday, US Treasury yields and the dollar index dropped to their lowest in months following dovish remarks from Federal Reserve governor Christopher Waller. The yield on the two-year US Treasury, which correlates with Fed Fund interest rate expectations, reached 4.75%, marking its lowest point since August 10. Similarly, influenced by monetary policy expectations, the US dollar index reached its lowest since August 11. Despite earlier declines, stocks rebounded, with the S&P 500 closing up by 0.1% and the Nasdaq Composite gaining 0.3%.
So far this week, US stock markets have been treading water as investors appear to be wary of taking too much of a directional view ahead of the early December run of tier-one economic data. For this week, that would encompass Thursday's PCE inflation release and Friday's ISM Manufacturing Index.
With stocks not firing higher cross-asset and momentum, traders continue to pile into "the path of least resistance trades". On Tuesday, the dollar reached a three-month low after Waller's dovish comments. US Treasury yields declined as investor confidence grew regarding the possibility of the US Federal Reserve initiating interest rate cuts by mid-2024
Usually, lower rates might be a welcome sign for shares as the pressure from high yields ebbs. But given the widely diverse economic narratives around 2024 expectations, there's also a lingering fear that what might drive those cuts could be a weakening economy. Hence,, selling the dollar and buying gold makes sense in many investors' eyes, especially with the market receiving a dose of a rate cut confirmation bias from Fed Waller, a hawkish and influential voice at the central bank. Indeed, dollar bears are having a field day with a Fed hawk now roosting with the doves.
While investors await news on inflation and business sentiment, the focus remains on the US consumer following the Black Friday and Cyber Monday shopping bonanza. The Conference Board's consumer confidence survey increased to 102.0 from 99.1 a month ago, surpassing expectations and offering some support to the soft landing camps. Although arguably,, survey data reliability has become a bigger problem in the post-pandemic era as seasonal adjustments remain distorted and the number of survey responses continues to decline.
While the weaker US dollar and lower rates will likely encourage investors to return to oil markets, the focus remains on OPEC. Given reduced compliance among some OPEC members, adherence to current production cuts will likely be a significant topic of discussion at Thursday's OPEC+ meeting. The prevailing lean is for an extension of the individual cuts made by Saudi Arabia and Russia, continuing at least through the first quarter of 2024, along with the group maintaining their existing cuts. However, oil prices are finding a bid as speculation builds that an additional modest backstop cut could possibly be considered during the discussions.
SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.
Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.
Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.