Markets Await ISM PMI Data for Fed Clues

STOCK INDEX FUTURES

The S&P and Nasdaq moved higher, while the Dow was little changed as the markets kicked off November following a strong rally in October that saw the S&P 500 rise 2.3%, the Dow 2.5%, and the Nasdaq 4.7% for its seventh consecutive month of gains. Market attention this week will center around ISM PMI survey data and ADP private nonfarm payroll figures for any clues on whether the Fed will cut rates next month due to the absence of official government data. Markets will be looking for signs of weakness in the labor market and subsiding inflationary pressures, which could increase speculation that the Fed will cut rates at its December meeting. Money markets are currently pricing in a 67% chance that the Fed will cut rates, down significantly after Fed Chair Powell said a December rate cut was not a foregone conclusion.

Markets will also get another week filled with corporate earnings after last week’s jam-packed slate. Tech earnings will dominate the calendar, and in specific, the AI trade. Palantir, AMD, Supermicro, Qualcomm, and Constellation Energy are all set to report quarterly results, among other major corporations. Berkshire Hathaway rose more than 1% in premarket trading on Monday following the release of its third-quarter earnings. Profits rose 17% due to a mild hurricane season and investment gains. Kimberly-Clark announced it will acquire Tylenol maker Kenvue, leading Kenvue’s stock to climb 20%, while Kimberly-Clark shares fell 15% following the news.

CURRENCY FUTURES

US DOLLAR: The USD index nears a three-month high to start the week ahead of private economic data that could shed some light on the health of the US economy and offer clues into the Fed’s move in December. A number of Fed officials have spoken publicly about their disinterest in a December rate cut. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack (non-voters) both said they did not see a need to cut rates last week and would find it difficult to justify a December rate cut. On the other hand, Fed Governor Waller (dove, voter) said he supports a December rate cut. The dollar index has traded within the 96-100 range over the last six months, leading markets to question what could break the dollar above the 100 level and if there is anything strong enough to support the rebound. Continued economic data that supports a hold on a December rate cut could lead to a breakout above 100.

EURO: The euro was little changed, paring earlier gains in what is a relatively quiet week on the data front for the eurozone after the European Central Bank held rates steady last week and as data showed a relatively upbeat view of the eurozone economy. Final purchasing managers index data revised Spanish, Italian, and French readings higher, while leaving Germany and the eurozone unchanged. The readings did little to move the currency. Final revisions to the services sector will come Wednesday. German manufacturing orders data for September will also be due on Wednesday, and industrial output figures will be released Thursday alongside eurozone retail sales data. For the ECB, it enjoys a rare period of low inflation and steady growth. The bank has made clear it is in no rush to change policy given that inflation is next to target and that growth is stable. It is unlikely the ECB will move to cut rates anytime soon, especially as downside risks have largely subsided.

BRITISH POUND: The pound is little changed following manufacturing PMI data for October that was revised slightly higher, which also showed that British factories had their strongest month in a year in October, although the growth was driven by one-off factors. Attention this week will center on the Bank of England’s interest rate decision on Thursday, where the bank is expected to keep interest rates steady at 4.0%. There has been a small but noticeable amount of investors who expect the central bank to lower interest rates by 25 bps, following last week’s softer-than-expected inflation data, which saw inflation remain unchanged at 3.8%. UK money markets are pricing a 31% chance of a rate cut at this upcoming meeting. The BoE will also release its quarterly monetary policy report, where it will show its forecasts for inflation and economic growth. Elsewhere, final PMI data for the services sector will be released on Wednesday.

JAPANESE YEN: The yen was little changed in a light volume session, as Japanese markets are closed today for a national holiday. Looking ahead, focus will center around the release of the Bank of Japan’s meeting minutes from its September meeting, where two board members proposed hiking rates to 0.75%. BoJ Governor Kazuo Ueda recently said that he sees no risk of Japan falling behind on the monetary policy side, signaling that the central bank is in no rush to hike rates after it held rates steady last week. Ueda also said that the bank wants to assess wage growth and further economic data before considering further rate hikes. The comments sent the yen down sharply as markets added to bets that the BoJ will not deliver a rate hike before year-end. On the data front, auto sales figures are due Tuesday, which should serve as an indicator of consumer demand, while household spending data will be released Friday.

AUSTRALIAN DOLLAR: The Aussie was little changed following household spending figures that showed spending rose only modestly. The Reserve Bank of Australia is set to meet on Tuesday, and markets are widely expecting the central bank to hold rates steady at 3.60% after third-quarter inflation came in well above expectations and after recent comments from Governor Michelle Bullock signaled that the labor market is in a solid place. Core inflation rests on the top of the RBA’s target band, and Trimmed Mean CPI, a key measure of inflation, rose 1.0% in the third quarter, above expectations of a 0.8% rise, making it unlikely that the bank could deliver a rate cut before year-end. Another factor adding to pressure is the surge in house prices. Recent data showed that home prices rose 1.1% in October, the biggest jump in more than two years, as rate cuts have fueled demand.

INTEREST RATE MARKET FUTURES

The curve steepened, with the 10-year yield holding above 4.1% as markets await private economic data that could further shape expectations of what the Fed will do come December. ADP employment and ISM PMI data this week will help provide a partial update on the economy with the release of official government figures still on hold. Several Fed officials have voiced their concerns with cutting rates in December. Dallas Fed President Lorie Logan said she did not see a need to cut rates last week and finds it difficult to cut rates again in December unless there are clear indications that inflation has subsided. Cleveland Fed President Beth Hammack said she thinks the Fed Funds rate is at a neutral level and is barely restrictive at all. Both officials do not have a vote this year but opposed last week’s rate cut and will have a vote starting next year. On the other hand, Fed Governor Waller expressed concern for the labor market and told the opposite story. He expects inflation to come down, adding that tariffs are unlikely to cause a jump in inflation, and is in favor of cutting rates in December. The comments highlight strongly differing views among policy members regarding how to proceed in December, and paired with an absence of data and inflation that is still resting well above the Fed’s target, there is likely to be strong resistance to continuing to lower rates. Markets are showing a 67% chance of a rate cut, compared to being nearly fully priced in before the decision.

The Treasury’s quarterly refunding announcement is due on Wednesday, and many expect the Treasury to hold auction sizes steady for the seventh consecutive quarter. US repo futures continue to reflect expectations of elevated overnight funding rates over the next two months. This comes despite the Fed announcing that it will reinvest all proceeds from its maturing mortgage-backed securities into Treasury bills. Reinvestment could amount to $15 billion in T-bill purchases per month.

The spread between the two- and 10-year yields rose to 50.50 bps, while the 2-year yield, which reflects interest rate expectations, moved lower to 3.602%.

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