Market Pulse: A New Era Unfolds
As the world prepares for Donald Trump’s inauguration as president on Monday, the US and global markets are bracing for impact. This week’s inflation-inspired retreat in US Treasury yields has been halted, thanks in part to salvos from a Federal Reserve governor and the incoming Treasury Secretary.
Yields Retreat, Stocks Rally
Two-year Treasury yields plummeted to their lowest level since January 2, a 20-basis-point drop from Monday’s peaks, after Fed board governor Christopher Waller hinted at the possibility of three or four interest rate cuts this year. This dovish stance, echoed by Bank of England policymaker Alan Taylor, suggests twice as much easing this year than currently priced into futures markets. As a result, Fed funds futures have moved closer to pricing two rate cuts in 2025.
Dollar Holds Steady, Yen Weakens
The dollar index held firm, despite the yen weakening on reports that the Bank of Japan would raise its key policy rates next week. Meanwhile, Wall Street stock indexes took a breather on Thursday, but futures were up again ahead of Friday’s bell and a three-day weekend due to Monday’s Martin Luther King holiday.
Bessent Hearing: A Key Marker
The confirmation hearing for Trump’s Treasury Secretary pick, Scott Bessent, was a crucial marker for the debt market and the dollar. Bessent reiterated plans to roll over Trump’s 2017 tax cuts, warning of an economic “calamity” if they were not extended. He also backed the dollar’s dominant global role, supported Fed independence, and ruled out debt default.
Economic Health Checks
The latest US economic health checks showed retail spending remained firm, weekly jobless claims ticked up, and business confidence jumped higher this month. December industry and housing starts numbers are due out later on Friday.
Global Economic Landscape
News of a 5% Chinese gross domestic product growth for 2024 met market forecasts and the government’s target, despite earlier doubts. Chinese stocks edged higher, but longer-term problems for the Chinese economy persisted, with data showing the population fell last year for the third year running. In Europe, euro zone inflation came in as expected, but Britain’s struggling economy was dealt another blow with a surprise drop in UK retail sales in December.
Key Developments Ahead
Later on Friday, key developments that should provide more direction to US markets include:
- US December housing starts and permits, Dec industrial production, Nov TIC data on foreign holdings of Treasuries
- US corporate earnings: State Street, Citizens Financial, Regions Financial, Truist, Huntington Bancshares, Schlumberger, Fastenal
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