Daily Market Pulse

Market Pricing In 38% Chance of Rate Cut In Q1 ’24

3 minute read

Data was interesting yesterday with an uptick in initial claims and a very poor NAHB survey. Market now pricing in a 38% chance of a rate cut in Q1 of next year. The question remains; Is the market pricing a rate cut because real rates are too high given disinflation or is the rate market beginning to infer a bigger deceleration in growth?

In speaking with a neighbor who runs a fund focused on the consumer & industrial markets, this has been an important month from an earnings perspective. For example, Wal Mart’s Chief Financial Officer John David Rainey said in an interview Thursday after they reported financial results that demand picked up in November, spurred in part by seasonal offerings.

The concentration of warnings in equities has largely been in consumer discretionary and industrials throughout Q3 numbers. Earnings breadth has remained poor both in the US and in Europe, but some say this rally has been about rate compression/multiple expansion and the hopefulness of adjustment cuts from the Fed into a soft landing.

EUR maintaining is strength but having trouble breaking above key resistance levels. The speculation that Fed rate cuts are being priced in coupled with weaker than expected inflation indicators (CPI & PPI) has helped maintain current levels.

GBP – Slipped vs the USD after the UKs Oct retail sales fell more than economists had expected. Bank of England Deputy governor said service inflation remains too high and that a drop in the headline rate of prices increase makes divergent trends that point to more persistence.

JPY - We have seen brief dip, but a quick bounce back move due to higher US yields and oil price action. Japan’s nominal exports declined 1.2%m/m in October after a 7.1% jump in September. However, when adjusted for prices, real exports strengthened 0.8%m/m last month, adding to a solid 4.4% gain in September. The consecutive monthly increases left the October level of real GDP-based exports 6.2% annualized higher than the 3Q average, firmer than 4Q forecast for a modest 1.0% contraction.

CAD- CAD gained vs the USD for the third day out of the last four, up along side other G-10 currencies. WTI crude moved higher, but then sank putting it on pace for a fourth week of losses. Two-year US yields exceeds CAD by almost 40 basis points, and the 10 year yield spread is over 75 basis points, which usually favors the USD.

MXN – Peso trimmed earlier gains as US treasury yields also reversed. Equity sentiment seems to be neutral, and not helping the market. The Peso is the best-performing Latin American currency this month, and third in the world.

BRL - Brazil’s real trying to edge higher at the open, tracking close emerging market peers. Economic activity data due when local markets open will be eyed for clues of when the central bank will start slowing down its easing cycle next year. BRL is up 3.5% this month, in line with the performance of many other emerging market currencies as traders seek high yield currencies on expectations US rates will head lower next year.

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