Assuming the Fed really does cut next week, what comes next?

We know traders are as confused as all get out when one narrative has it the fluttery stock market scared some more folks into the fixed income market, lifting yields. One story says yields were already on the rise because of the shirt-lived data center failure in futures (and weirdly, Australia the next day). And indeed the dollar got a boost yesterday that matched the yield gain, but it seems an inadequate explanation.

Today we get Nov auto sales and a tattered JOLTS for September. One of the purposes of JOLTS is to judge the demand for labor (openings) but some unknown percentage of employers were claiming to seek employees with impossibly high qualifications, reducing its usefulness. Attention turned to voluntary quits and other components. The drop in openings could be due to more realistic offerings or to a genuine drop is opportunity. The one-year chart is scary. But see the 10-year chart. One reason recent numbers look so bad is because the recovery from Covid was so strong. The market has been starved for data for so long that it’s possible Sept data will move a needle or two, but we are not counting on it.

Probably of more importance will be the Black Friday and Cyber Monday retail sales. Press reports so far have it that US consumers are shopping ‘til they drop, without regard for any higher prices or their credit card balances. This is a “told you so” moment for those of us who see Americans as endlessly materialistic. Wolf calls them drunken sailors. A small point: most consumers are happy to buy junk. But more quality-sensitive patrons of some retail chains like Target are staying away. Target can’t understand it. Quality?

Assuming the Fed really does cut next week, and nearly the entire world thinks it will, what comes next? We are already getting “the year ahead” from the usual subjects. They are almost always really wrong. See the chart from Bloomberg. The point is that additional cuts next year are not all that likely. 

But at the same time, tariffs did not bring disaster down on our heads. We will see it with the holiday retail sales and most likely, a fairly tame PCE inflation on Friday. And while few pay a lot of attention to the OECD, it does have some influence. It now says US growth will be 2% this year, better than the earlier forecast in Sept of 1.8%. Reuters reports “In its Economic Outlook, the Organisation for Economic Cooperation and Development forecast global growth would slow modestly from 3.2% in 2025 to 2.9% in 2026, leaving its forecasts untouched from its last estimates in September. It predicted a rebound to 3.1% in 2027.”

Global trade will still be cut in half because of the Trump tariffs, so a lot depends on resiliency.

This time we have the Ukraine war to worry about as much as anything. We doubt it’s over this time—the two clowns Trump sent to Putin are so wildly unqualified they simply can’t get a result, right? But if the war gets ended in 2026, current growth forecasts are out the window. Think grain and energy prices, among other factors.

Forecast

A lot depends on the stock market. The rest of the world is (mostly) back on track and US index futures point up so far today. Unless and until the tech bubble bursts, we have no reason not to expect the usual Santa Claus rally. If bitcoin really has ended its giant correction, risk-off can retreat. This removes some risk aversion energy from the dollar. Add that to the upcoming rate cut, and unless it’s already priced in, the dollar can fade again.

Again we have to say the reasons for the dollar to fall number in the dozens while the dollar has some Godzilla reasons to hold its own—the economy, the numeraire, the reserve currency, the markets bigger than everyone else’s combined.

Tidbit: Can Canada get along without the US? Mr. Carney may need to devise a new strategy. “Canadians have little faith a trade accord with the US will be reached in the short run. Some 67% of them say it’s unlikely a deal to lower US duties will be achieved over the next six months, according to a poll in late-October by Nanos Research Group for Bloomberg News.”