Written Commentary
STOCK INDEX FUTURES
The indexes are lower as tech leads the downside, with the December Nasdaq contract down nearly 1%, while the S&P and Dow also lagged. All “magnificent seven” stocks are down in premarket trading. Focus today will rest on ISM manufacturing PMI data out at 9:00 a.m. CT for November. Forecasts are expecting a reading of 49.0, which would keep the index in contractionary territory but would be a step above October’s 48.7. Services PMI figures will follow on Wednesday and will be closely watched for any signals on the health of the labor market, given there will be no official data on it until after the Fed meets. Markets are strongly expecting the Fed to lower rates next week after a mixed September jobs report and dovish commentary from several Fed officials. Looking ahead, PCE inflation data for September will be out Friday.
CURRENCY FUTURES
US DOLLAR: The USD index is lower as markets continue to increase bets of a rate cut out of the Fed next week. Markets are now implying over an 87% chance of a December cut, up from around 30% odds by mid-November, as recent comments from several notable Fed officials has been dovish. Money markets show little chance of a cut following the December meeting into 2026. Division among FOMC members is likely to provide strong 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.
EURO: The euro reached a two-week high as markets overlooked manufacturing PMI data, which came in below expectations for Germany, Spain, and the eurozone as a whole. Shifting expectations of a rate cut from the Fed next week have provided strength for the euro in recent sessions. On the data front, inflation data out tomorrow will be eagerly awaited for confirmation that the European Central Bank will keep rates on hold for the time being. Any reading near 2% will be enough to keep rates steady; forecasts are expecting inflation to come in at 2.1%. Services PMI figures will follow on Wednesday and are likely to get more attention. Friday’s slate will include final third-quarter GDP data and unemployment figures for the eurozone alongside industrial production figures from France and Spain.
BRITISH POUND: The pound is higher as a relief rally overtook the sterling in the wake of Finance Minister Rachel Reeves’s budget, which aims to raise £26 billion in new taxes to support welfare programs. On the data front, mortgage approvals in the UK rose more than expected in October, although net lending to individuals fell below forecasts. Manufacturing PMI came in line with forecasts with a reading of 50.2; services PMI figures will be out on Wednesday. Money markets show a 90% chance of a cut from the Bank of England later in December, which would lower the base rate to 3.75%.
JAPANESE YEN: The yen gained sharply against the dollar following comments from Bank of Japan Governor Ueda, who said the BoJ will weigh the “pros and cons” of raising rates at its next meeting later in December. Ueda also noted that future policy moves will be discussed more after the bank raises rates to 0.75%. December’s policy decision will likely be guided by early signals on wage negotiations, known as Shunto, as Ueda has said he would like to see more clarity regarding the negotiations. Increases in wage growth will help support underlying consumer demand and, in turn, support stable inflationary pressures. Early signs from the negotiations point to a solid round of pay hikes in the country, although negotiations should continue to be monitored for signals on how the BoJ will move in December. Elsewhere, Finance Minister Katayama said on Sunday that recent volatile swings in the yen are not driven by fundamentals and that currency intervention remains as an option for dealing with excessive volatility. Markets now price in roughly an 80% chance of a hike in December, up from around 60% last week. Last week, Tokyo core CPI figures came in hotter than expected, firming the case for a rate hike from the Bank of Japan. Prices rose 2.8% on the year in Tokyo, while the unemployment rate remained steady at 2.6%.
AUSTRALIAN DOLLAR: The Aussie edged higher as markets look ahead to Wednesday, when Reserve Bank of Australia Governor Michelle Bullock will face questions from parliament. Bullock is likely to be asked if the central bank cut rates too quickly in the face of seemingly rising inflation. Also due Wednesday will be third-quarter GDP data. Markets are implying little chance of easing from the RBA next year. It seems most probable that the RBA will look to raise interest rates again in 2026 as rising inflation risks appear in the economy. GDP data will be scanned for insights into productivity growth and consumer spending for clues on inflation.
INTEREST RATE MARKET FUTURES
Yields are higher across the curve, following moves in Japanese bond yields as signs of a rate hike from the BoJ have lifted yields. Investors in Japan hold over $1 trillion worth of US bonds due to ultra-low rates over the past 20 years. A sustained rise in JGB yields could see selling of US Treasuries into JGBs. Markets are implying over an 87% chance that the Fed will cut rates at its meeting next week following the string of dovish commentary out of Fed officials. Spill-over selling also came from Germany after Germany’s parliament announced the 2026 budget on Friday, which increased new debt by 180 billion euros.
President Trump said he has made his new Fed Chair pick and that an announcement will come soon. Trump declined to confirm that his nomination to replace Chair Powell will be Kevin Hassett, current director of the president’s National Economic Council. Hassett now has a 64% chance of getting the nomination, according to bets on prediction markets – up sharply from under 40% early last week.
The spread between the two- and 10-year yields rose to 55.10 bps, while the two-year yield, which reflects short-term interest rate expectations, rose to 3.508%.
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