Delayed PCE Data on Deck

STOCK INDEX FUTURES

The indexes edged higher as markets await today’s September PCE inflation data, which is the Fed’s preferred measure of inflation, for further clues on how the central bank will move at its meeting next week. However, it is unlikely that the reading will shift expectations for next week’s policy too much. Megacaps were mostly higher in premarket trading, including Nvidia (0.4%), Microsoft (0.3%), Amazon (0.5%), Alphabet (0.4%), Meta (0.5%), and Broadcom (1.2%), while Apple and Tesla hovered near the flatline. Meanwhile, Netflix shares fell about 1.9% after the company announced a deal to acquire Warner Bros. Discovery.

The S&P, Nasdaq, and Dow finished Thursday flat as markets remain focused on next week’s Fed decision and digested mixed labor data that ultimately left markets pricing in a rate cut. ADP reported a surprise decline in private payrolls, while Challenger reported elevated layoff levels in November, reinforcing easing expectations despite a lower weekly initial claims figure, which was likely impacted by the shortened week.

CURRENCY FUTURES

US DOLLAR: The USD index edged higher ahead of inflation data out later this morning. The dollar has fallen to five-week lows this week as bets of a December rate cut from the Fed have risen; weak ADP private payroll data earlier in the week saw the dollar drop, while major foreign currencies have advanced on positive data. Strong data out of the eurozone and increased expectations that the Bank of Japan will raise interest rates supported major foreign currencies, further weighing on the dollar. Looking to 2026, division among FOMC members is likely to provide headwinds to the path of future easing as inflationary pressures in the economy remain present, especially in the services sector. There is a large amount of labor data due before the January FOMC meeting, which will likely sway opinion at the Fed as data collection efforts resume to normalcy. Currently, markets are pricing in two to three cuts from the Fed in 2026.

EURO: The euro edged higher against the dollar ahead of today’s PCE data. Revised GDP figures showed that the eurozone economy grew at a faster pace than previously estimated in the third quarter. GDP grew 0.3%, above an initial 0.2% estimate, helped by a rebound in investment spending and stronger growth in Italy. Investment spending rose 0.9% after having fallen 1.7% in the second quarter. However, net trade weighed on the economy, as imports rose at a faster pace than exports. That dynamic reflects a symptom of a stronger euro, which makes foreign goods more affordable and exports pricier for foreign buyers. Year-to-date, the euro is up 12% against the dollar. This dynamic also gives reason to believe that inflation will cool in the eurozone over the coming year as the euro’s strength lowers prices of foreign goods and services. Earlier this week, positive revisions to PMI data showed that business activity expanded at its fastest pace of growth in over two years. Demand conditions improved at the quickest rate in a year and a half, while employment in the sector continued to rise. Input price inflation remained near 12-month lows, while output charges rose at the softest pace in almost five years. The readings reflect what has been a strong recovery in the services sector for the eurozone as a whole, and paired with a slight rise in consumer prices, especially with services sector inflation at 3.5%, the data supports the view that the European Central Bank will continue to stand pat on rates for the time being. Diverging policy signals between the Fed and the ECB are likely to provide the euro with a strong floor against the dollar, barring any shocks like a surprise rate hold from the Fed. Markets are pricing in only a 25% chance of any easing next year.

BRITISH POUND: The pound retreated from a monthly high overnight but is still up over 0.1% against the dollar. Markets are pricing in nearly a 90% chance of a rate cut at the Bank of England’s policy meeting in two weeks despite perceived opposition against lower rates from some officials. Four hawkish members remain cautious of persistent inflationary pressures, while doves on the board argue the economy is slowing and the labor market is loosening. Governor Bailey is expected to cast the deciding vote. Recent UK services PMI data, although revised higher, remained below October’s reading as a slowdown in business activity growth and weakening demand conditions impacted businesses. For the private sector as a whole, growth was revised slightly higher but also remained below October’s reading. Softening demand conditions led employers to cut employment, while businesses reported declined new orders, leading to soured expectations of future conditions. Input costs also rose, while output prices fell as a competitive price landscape forced companies to keep prices low, hurting bottom lines.

JAPANESE YEN: The yen weakened against the dollar ahead of today’s PCE data out of the US. Expectations that the Bank of Japan will raise interest rates this month have provided the currency with some strength in recent days. A Reuters report out early Thursday cited three government officials who said that the BoJ will raise interest rates without any objections from the current administration. Reinforcing this view are comments from Finance Minister Katayama, who said on Tuesday that she saw no difference between the government and BoJ on their assessments of the economy. Looking past December, it remains uncertain as to the extent of tightening the economy could see out of the central bank. It is likely that further tightening could face strong resistance from the administration as well as from members of the BoJ. In an address to parliament today, Governor Ueda said there was uncertainty on how far the bank should hike rates due to the difficulty of estimating what would constitute a neutral rate. Shunto wage negotiations should continue to be scrutinized for a final outlook on December’s interest decision, as a strong increase in wages will help underlying consumer demand and support stable inflationary pressures. Conditions that the BoJ said would need to be met as a precursor to moving rates higher. Looking ahead, market attention will shift to how far policy direction will go in 2026.

AUSTRALIAN DOLLAR: The Aussie gained strongly against the dollar as recent data revealed various inflationary factors in the economy. Domestic data showed that household spending showed a 1.3% jump in October, the biggest increase since early 2024 and a hot start to the current quarter. This comes as Wednesday’s weaker-than-expected GDP data revealed a silver lining: strong domestic demand, which has been supported by housing construction, government and consumer spending, and business investment. Third-quarter private-sector demand rose by 1.1% to be up 3.1% over the past year, which, excluding the years of the pandemic, was the largest quarterly gain since 2017. Residential investment increased by 2.0% in the quarter to be up by 6.5% from a year ago, while business investment increased by about 3.5%. Annually, GDP grew 2.1%, slightly below forecasts of 2.2% and following a 2.0% rise in the second quarter. Despite the growth missing forecasts, the inflationary signals present in the data could be strong enough to suggest that the economy does not need any stimulus to help the economy. The Reserve Bank of Australia meets next week and is expected to keep rates steady and warn about inflation risks. Markets have priced out almost any chance of a further easing and suggest that when rates move, they will move upwards.

INTEREST RATE MARKET FUTURES

Yields are steady ahead of today’s September PCE inflation data, which is the Fed’s preferred measure of inflation. The data could impact some decision-making at the Fed, although it is becoming widely expected that the bank will lower rates next week. Markets are pricing an 87% chance of a rate cut next. On the labor front, weekly claims data on Thursday came in well below expectations, hitting its lowest level since September 2022. However, it is possible that the results were skewed, as the data was collected during the shortened Thanksgiving holiday week. Meanwhile, Challenger job cuts data showed that US employers announced 71,321 job cuts in November, the highest for the month since 2022, compared to 57,727 a year earlier. However, layoffs fell from 153,074 in October, although they are still at elevated levels compared to last year.

ADP data reported a 32,000 decline in private payrolls last month. However, precedent has shown that official data often diverges from ADP’s reading, so too much weight should not be put on it. Regardless, the lack of official data has offered markets very few other places to look for clues on the labor market.

At a White House event on Tuesday, President Trump dropped a major hint about the Fed chair role, saying that a “potential” future chairman of the Fed was in the room, while Hassett stood close by. Prediction markets are implying over an 80% chance that Hassett will be nominated as the next Fed Chair.

Regarding the December meeting, it is likely that the FOMC will see Waller, Williams, Miran, and Bowman all vote for a cut, leaving eight other members’ decisions up in the air. Powell, Cook, and Jefferson have seemingly unknown stances, while Collins, Schmid, Goolsbee, Musalem, and Barr have all offered cautious comments in recent weeks. Given that Williams is a key ally to Powell, that could sway the Chair to vote for a rate cut and bring some other members with him as well.

The spread between the two- and 10-year yields is 10 bps higher at 57.60 bps, while the two-year yield, which reflects short-term interest rate expectations, rose to 3.540%.

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