SIFs Remain in a Rut

STOCK INDEX FUTURES

The indexes continued to fall, as investors remained in a risk-off sentiment amid renewed concerns over high valuations in AI and tech stocks, ahead of Nvidia’s earnings report, scheduled for release after the market close tomorrow, followed on Thursday by the delayed BLS employment report from September. Nvidia shares were down about 1% in premarket trading. The VIX is up 4.7% to 23.44 and just off the overnight high of 23.91, which was the highest since 28.99 on October 17.

Home Depot’s Q3 earnings fell short on the top and bottom lines, with the company also cutting its full-year profit outlook. CFO McPhail said that ongoing consumer uncertainty and continued pressure in housing are impacting home improvement demand. Target will report third-quarter earnings tomorrow after the closing bell. Other key releases this week are the FOMC’s meeting minutes for October on Wednesday, Existing Home Sales on Thursday, and Flash S&P PMIs and the University of Michigan Consumer Sentiment and Inflation Expectations to round out the week on Friday.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed. The latest Labor Department data showed initial jobless claims at 232K for the week ended October 18 vs. expectations of 223k, while continuing claims reached 1.957 million, the highest level since August. Expectations of a Fed rate cut next month have been pared back substantially, with Fed Funds futures pricing a 46.6% chance of a rate cut next month. Meanwhile, Fedspeak remains mixed. Fed Governor Waller continued to build the case for further rate cuts amid a broad policy dispute at the Fed, while Fed Vice Chair Philip Jefferson said the bank needs to “proceed slowly.” Despite being two months backwards looking, September’s payroll report will likely provide guidance on how the Fed will move in December and impact dollar direction.

EURO: The euro is little changed against the dollar, with markets awaiting policy signals from Fed officials and speeches from European Central Bank officials for price direction in what is a quiet week of data for the eurozone. On Monday, ECB Vice President Luis de Guindos expressed confidence that Eurozone inflation will converge toward the bank’s target, while the European Commission on Monday raised its economic forecast for 2025 to 1.3%, up from 0.9%. Recent concerns over France’s fiscal trajectory, which had pressured the euro, have eased; Prime Minister Sebastien Lecornu survived two no-confidence votes in parliament last month. The finance ministry said on Monday companies have pledged to invest 9.2 billion euros in France. Looking ahead, Flash PMI data for France, Germany, and the Eurozone on Friday will grab attention. Eurozone manufacturing is expected to show a slight expansion, with contractions in Germany and France moving closer to stabilization. Services activity is projected to remain strong. Diverging policy between the Fed and ECB could bolster euro strength against the dollar if the Fed moves to cut rates in December.

BRITISH POUND: The pound is little changed against the dollar as investors wait for inflation data due early Wednesday, which will provide further policy clues on the Bank of England’s interest rate decision in December. Inflation is expected to drop to 3.5% from 3.8%. The sterling remains vulnerable to Wednesday’s inflation reading, as a softer reading will likely open the door for a December rate cut after data revealed sluggish economic growth and rising unemployment. UK money markets are pricing roughly a 75% chance of a December rate cut from the BoE. Elsewhere on the data front, retail sales data due on Friday will serve as a check-in on consumer strength, while Flash PMI data for November will also provide further clues on the economy. Manufacturing is expected to show a further contraction in activity, while growth in the services sector is likely to moderate. Markets also remain weary regarding the UK budget scheduled for release on November 26, after the Financial Times reported that the Labour government dropped plans to raise income taxes, a move that led to a rise in gilt yields and a drop in the sterling.

JAPANESE YEN: The yen is little changed, hovering near 10-month lows against the dollar as markets await a meeting between Prime Minister Sanae Takaichi and Bank of Japan Governor Kazuo Ueda. Markets will eye the meeting for signals on how policymakers may manage pressure on the yen, amid calls from Takaichi for a cautious approach to rate hikes. Governor Ueda has signaled there is a possibility of raising interest rates as soon as next month, while Takaichi has voiced her displeasure over the idea and urged the BoJ to cooperate with government efforts to reflate the economy. Takaichi’s Abenomics-style policies are likely to keep pressure on the yen, as the administration is considering compiling a stimulus package sized around 17 trillion yen ($110 billion) to ease rising living-cost pressures. Despite recent talk of foreign-exchange intervention from government officials, it does not appear likely in the near term. Elsewhere, third-quarter GDP clocked in above expectations at -0.4%. A drop in private consumption and net trade weighed on activity as rising food prices, especially rice, took a toll on consumers. Despite the drop in growth, consumer consumption remains solid and could help inflation get back to its 2% target, opening the door for a rate hike.

AUSTRALIAN DOLLAR: The Aussie is higher after minutes from the Reserve Bank of Australia’s November policy meeting showed the central bank judged the current cash rate of 3.6% as being slightly restrictive but said it was possible this was no longer the case, citing a jump in housing credit to investors. Strong economic data, a falling unemployment rate, and rising inflation give the RBA little urgency to ease policy, as the bank has potentially ended its easing cycle. Quarterly wages data due on Wednesday are expected to show a 0.8% gain, which would leave the annual pace steady at 3.8%, which would likely reinforce the view of a strong labor market after a solid jobs report just last week. On Thursday, RBA’s chief economist, Sarah Hunter, will speak and is expected to offer hawkish remarks.

INTEREST RATE MARKET FUTURES

Yields moved lower across the curve amid a decline in the equites around the globe. Fed Funds futures are showing that investors are almost evenly divided on the prospect of a rate cut. JP Morgan’s weekly Treasury Investor Survey as of Nov 17 vs. the week of November 12 showed that investors modestly pared outright longs but held shorts unchanged ahead of Thursday’s jobs report, reflecting hawkish Fed commentary. September’s report will likely stir volatility for markets, although it will not be entirely reflective of the state of the labor market. Accurate and reflective figures likely will not come until early January, when December’s report is due, and those figures could also be distorted due to the shutdown as well.

Fedspeak on Monday offered little clues as to how the Fed will move in December, apart from the fact that policymakers remain divided over how to move on policy. Governor Waller and Vice Chair Jefferson offered differing views on policy, with Waller in the dove camp and Jefferson urging caution. S&P PMI data out later in the week is likely to gain attention on the heels of September’s labor data, especially in regard to its employment and prices indexes. ISM’s PMI data suggested that labor market conditions remain weak and that price pressures, specifically in the services sector, remain elevated. Labor market conditions show little improvement ahead of December’s FOMC meeting, which could strengthen the case for another hawkish rate cut. However, uncertainty over labor stability amid falling worker supply and demand and elevated inflation adds to the Fed’s cautious stance.

The spread between the two- and 10-year yields rose to 53.20 bps from 53.10 bps on Monday, while the 2-year yield, which reflects interest rate expectations, fell to 3.562%.

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