Chip Exports to China in Focus

STOCK INDEX FUTURES

The indexes are higher as markets look to recover from last week’s volatility, as odds of a December cut from the Fed have been upped significantly following comments from NY Fed President John Williams. Williams said that the risks to the labor market are greater than risks from inflation. Focus this week will center around PPI and retail sales figures, both due on Tuesday, in what is a shortened week of trading due to the Thanksgiving holiday.

On the tech front, focus will center on Nvidia’s potential chip exports to China, as reports have circulated around discussions to allow for the sale of its H200 chips to Beijing. The US had previously approved the sale of Nvidia’s H20; however, China said it would not buy the chip due to security concerns. Nvidia’s CEO Jensen Huang has been lobbying the Trump administration to lower export controls.

The Trump administration is reportedly preparing a backup plan if the Supreme Court’s ruling over President Trump’s tariffs goes against the administration. It is not clear when the Supreme Court will announce its ruling, which will leave markets on edge as the fallout from the reversal of those policies remains murky.

CURRENCY FUTURES

US DOLLAR: The USD index is lower, still feeling pressure from recent comments from NY Fed President John Williams, who on Friday said there was room to lower interest rates as the faltering labor market provides more downside risks than inflation. Bets on a December rate cut jumped substantially following the comments. Markets are now seeing a 75% chance of a December cut from the Fed, up from as low as 30% during trading last week. Producer price index data for September on Tuesday should offer some insight into how tariff-induced inflation has managed alongside retail sales figures, also due out on Tuesday. Despite Williams’ comments on Friday, there still remains caution among several FOMC members. Boston Fed President Susan Collins said she has not yet made up her mind on a potential move, while several other officials have downplayed labor market weakness.

EURO: The euro moved higher against the dollar as renewed expectations of an interest rate cut from the Fed weighed on the dollar, while recent data out of Europe supports the view that the European Central Bank will hold interest rates steady. PMI data last week showed that eurozone private-sector activity grew strongly in November, just below a two-year high recorded in October and in line with forecasts. German business sentiment fell slightly in November per the Ifo Institute’s business-climate index, falling to 88.1 from 88.5 in October. Short-term business expectations fell, as companies reported having little hope that an economic recovery will come soon despite plans from Germany’s government to spend hundreds of billions on defense and infrastructure. It is a heavy week of data in the eurozone, with France’s November consumer confidence survey due Tuesday and Germany’s GfK consumer climate on Thursday, alongside consumer and business confidence surveys from Italy and the eurozone. French consumer spending data for October is due on Friday, while the ECB will release its consumer expectations survey. Initial inflation data for November from France, Spain, Italy, and Germany are also due on Friday, alongside German unemployment figures.

BRITISH POUND: The pound is little changed as markets await the UK’s autumn budget on Wednesday, in what has seemingly been its most anticipated budget announcement in decades. Uncertainty over fiscal policy has driven volatility in the sterling and in gilt yields over the last several weeks, as markets questioned the government’s ability to manage self-imposed fiscal rules. If Finance Minister Rachel Reeves offers a well-balanced budget, it could likely offer some support for the sterling and for gilt yields. However, political risk remains a factor for the currency after the government’s reversal on hiking income tax and reports that Prime Minister Starmer was under fire from members of his own party. Any potential downside risks to the economy related to the budget will be closely watched for the sterling, alongside the government’s forecasts for the economy, which could trigger a reaction in the pound. Data out of the UK on Friday showed that business growth this month was negligible and that retail sales had tumbled in October, while a closely watched gauge of household sentiment also fell.

JAPANESE YEN: The yen is down 0.3% against the dollar as markets continue to watch for signals of a possible intervention from government officials as the currency approaches levels that previously brought intervention from the government. Trading is thinner today as a public holiday in Japan has markets closed. The 158-162 level likely brings a greater chance of official buying from Tokyo based on previous intervention levels. Thanksgiving could offer government officials a window to step in. However, if the yen hits the 160 level and there is no buying from the government and no signals on buying either, the yen could slide further in reaction. Looking ahead, a speech from Bank of Japan policy member Asahi Noguchi on Thursday will be closely watched as markets look for hints on when the next rate hike from the BoJ will come. Tokyo’s November consumer-price index excluding fresh food is expected to rise 2.7% from a year earlier, slightly softer than October’s 2.8% reading. Consumer inflation in Tokyo is considered an early indicator of nationwide trends. Sustained inflation will offer the central bank reason to resume its tightening cycle, although the timing of when the next hike is still up in the air. Industrial production, retail sales, and employment figures for October are also due Friday.

AUSTRALIAN DOLLAR: The Aussie was little changed ahead of a quiet week of data. Australia’s statistics bureau will release the new complete monthly CPI data on Wednesday to replace the old and partial series. Even though the data is new and the Reserve Bank of Australia is not putting too much weight on it yet. Instead, focus will remain on prices in housing and market services to get a better gauge on inflation trends. Regardless, softer electricity prices should see headline CPI fall. Swaps imply little chance of a rate cut from the RBA until May, when a rate cut is about 50% priced in, after an inflation surge in the last quarter dented hopes for any more policy easing this year.

INTEREST RATE MARKET FUTURES

The curve flattened, with yields higher at the front and lower at the long end as hedging ahead of today’s $69 billion two-year note auction and Wednesday’s $70 billion five-year note auction takes place. Thanksgiving is likely to bring a lack of volume to markets this week, further explaining the higher front-end rates amid increased expectations of a Fed rate cut in December. NY Fed President Williams’s comments on Friday jolted the bonds higher, as he signaled he was open and willing to lower rates at the Fed’s next meeting due to risks to the labor market, which he perceives as greater than the risks of inflation. Elsewhere in Fedspeak, Governor Waller said that he is advocating for a rate cut at the December meeting given that the labor market has weakened since the October meeting, but there has not been much change in inflation. Somewhat on the contrary, Boston Fed President Susan Collins said she was unsure of how to move in December, while Dallas Fed President Logan said it would be difficult to cut rates again in December. There will be no further labor data ahead of the Fed’s December meeting after September’s labor figures offered little to resolve the debate at the Fed.

On that topic, weekly jobless claims data on Wednesday is likely to take on more importance after the BLS announced it will publish the full October nonfarm payrolls report and the November report on December 16, after the Fed’s meeting. The Fed’s Beige Book, or summary of current economic conditions, is also due Wednesday.

The spread between the two- and 10-year yields is 52.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is at 3.514%.

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