Election Jitters
Saturday, October 19, 2024 (Week 42)
The United States' political landscape, a federal presidential republic dominated by the Democrats and Republicans, is heading towards a crucial moment: the Presidential election on November 5th, 2024. This event will heavily influence investor sentiment towards the USD, impacting everything from domestic policy to the nation's global standing.
A key market theme impacting the USD over the past month has been the Federal Reserve's policy manoeuvres and their effect on the economic outlook. Specifically, the Fed's surprising 50 bps rate cut on September 18th (Federal Reserve) initially triggered a market rally, pushing the Dow and S&P 500 to record highs. However, this initial euphoria was quickly tempered by Fed Chair Powell's cautious remarks about further easing and persistent core inflation, which reached 3.3% in September, above forecasts (U.S. Bureau of Labor Statistics, October 10th). Adding to the complexity, jobless claims surged to a 14-month high the same week (U.S. Department of Labor). These mixed signals created volatility for the USD, with the dollar index fluctuating significantly since the rate cut.
Investment Thesis:
Upcoming Week (October 19th - 25th): Neutral. Considering the key economic data releases due this week—including existing home sales, initial jobless claims, and flash PMI figures—the potential for volatility is high. Further signals from Fed officials could also introduce uncertainty.
Upcoming Month (October 19th - November 30th): Neutral. With the US Presidential election looming on November 5th, political risks are substantial. The market's reaction to the election's outcome will be crucial, as will any signals from the Fed about its easing cycle. Persistent core inflation may limit aggressive easing, offering some support to the USD, while geopolitical tensions add further complexity.
US Financial Markets: Election Jitters and a Dollar in Limbo
The US financial markets, with the USD at its core, are facing a period of significant uncertainty. The USD remains the world's reserve currency, but its strength is being tested. The stock market, as reflected by the Dow, S&P 500, and Nasdaq, is navigating a complex landscape. The bond market, benchmarked by the 10-year Treasury, is highly sensitive to shifts in Fed policy. Commodities like crude oil play a significant role. The upcoming Presidential election on November 5th adds another layer of complexity, potentially reshaping the economic and political landscape.
A Rollercoaster Ride: US Stock Market Performance
The US stock market has seen considerable volatility over the past month. Following the Fed's rate cut on September 18th, the Dow and S&P 500 surged to new records, driven by optimism around lower borrowing costs. However, this initial rally was countered by concerns about persistent core inflation, future Fed policy, and escalating geopolitical tensions, leading to subsequent declines. The Nasdaq underperformed due to rising bond yields and tech sector anxieties. This performance has had a mixed effect on the USD, with risk-on sentiment generally weakening the dollar, while risk-off periods have offered some support.
Yield Curve Crossroads: US Bond Market Dynamics
Over the past month, the US bond market has reacted to shifting expectations for Fed policy. The 10-year Treasury yield initially fell to 15-month lows around 3.65% (Trading Economics, September 13th) on aggressive easing bets following weaker economic data. However, stronger data and more cautious Fed comments prompted yields to rise towards 4%. This volatility mirrors the market’s uncertainty. The bond market can impact the USD: lower yields often weigh on the currency, while higher yields provide support.
Energy's Equation: Crude Oil and the USD
Crude oil has played a significant role in influencing the USD over the past month. WTI crude has traded within a range, with prices influenced by geopolitical tensions, demand concerns in China and the US, and OPEC+ production plans. The relationship between oil and the USD has been complex. Geopolitical risks pushing oil prices higher can trigger haven flows into the dollar. Conversely, worries about the global economy, often linked to softer oil demand, can weigh on the USD.
US Economy: Election Crossroads
The US economy, diverse in its industries, faces significant challenges and opportunities. Exports include manufactured goods, agricultural products, and services, while imports consist primarily of manufactured goods, crude oil, and consumer products. Trade relations with major partners like China, Canada, Mexico, and the EU are crucial. The November 5th Presidential election is the most important upcoming event. It has the potential to drastically alter economic policy and impact growth.
GDP Growth: A Balancing Act
US GDP growth, though revised up to an annualised 3% for Q2 (U.S. Bureau of Economic Analysis, September 26th), faces headwinds. Recent data, like the September ISM Manufacturing PMI showing continued contraction (Institute for Supply Management, October 7th), suggests a slowing pace. Trading Economics forecasts 1.2% growth for Q3. Weaker GDP figures could weigh on the USD, while resilience would offer support.
Inflation's Persistence: Core Pressures Remain
Inflation is a persistent challenge. While headline inflation eased to 2.4% in September (U.S. Bureau of Labor Statistics, October 10th), core inflation rose to 3.3%. This suggests underlying price pressures remain, which complicates the Fed’s policy stance and its potential impact on the USD.
Labour Market: Tightening Grip
The US labour market shows mixed signals. September non-farm payrolls rose by a robust 254K (U.S. Bureau of Labor Statistics, October 10th), yet initial jobless claims are elevated (U.S. Department of Labor, October 10th). The unemployment rate, however, fell to 4.1%. The market's direction will depend on whether strength or weakness prevails.
Sentiment’s Slide: A Cautious Mood
Consumer and business sentiment have softened. The University of Michigan consumer sentiment fell in October (University of Michigan, October 11th), and the NFIB Small Business Optimism Index declined in August (NFIB, September 9th). This weakening sentiment adds to economic anxieties.
Upcoming Data: A Week of Insights
Key US economic data releases for the coming week are:
October 23rd: Existing Home Sales
October 24th: Initial Jobless Claims, Flash PMI figures
October 25th: Durable Goods Orders
US Monetary Policy: The Fed's Balancing Act
The Federal Reserve, under the leadership of Jerome Powell, is responsible for US monetary policy. The FOMC sets interest rates and manages tools like QE and QT. Its dual mandate is maximum employment and price stability. The November 7th Fed interest rate decision is the most crucial upcoming event for monetary policy, offering potential direction on the easing cycle.
Fed on a Tightrope: Easing Amidst Inflation
The Fed's recent moves reflect a delicate balancing act. The 50 bps rate cut in September (Federal Reserve) marked a dovish turn, but Powell’s cautious tone and divided opinions within the FOMC, as revealed in the minutes (Federal Reserve, October 9th), created uncertainty. While two further 25bps cuts are projected this year, the actual path hinges on data, creating a complex environment for the USD.
US Geopolitics: Election Uncertainty
Political Landscape: Election Looms
The November 5th Presidential election introduces significant political risks. Differing economic policies among candidates fuel uncertainty. The USD's reaction to the outcome will be critical.
Geopolitical Risks: Middle East Tensions
The Middle East conflict poses a substantial geopolitical risk. Oil supply disruption fears have at times strengthened the USD due to safe-haven demand.
Sovereign Risk: US Fiscal Position
The US has low sovereign risk, but the widening budget deficit, reaching $380 billion in August (U.S. Treasury, September 13th), warrants attention. Deterioration could pressure the USD.
USD: A Currency in Flux
The dollar index has fluctuated. Future USD valuation depends on data, with stronger data possibly slowing easing and boosting the dollar, whereas weaker data could accelerate rate cuts. The Presidential election introduces significant uncertainty.
The upcoming week's fundamental outlook for the USD is uncertain. Key data releases and the Presidential election campaign create a complex backdrop. The interplay between potential Fed easing, persistent inflation, and geopolitical risks will drive sentiment. Weaker-than-expected economic data could accelerate rate cuts, impacting the USD, while any surprises in the political arena could add to volatility.
Key Takeaways:
Keep a close watch on economic data, particularly existing home sales, jobless claims, and PMIs.
Monitor the Presidential election campaign for potential market-moving developments.
Implement robust risk management strategies given the uncertainty around the USD's near-term trajectory.
Sources:
Federal Reserve, U.S. Bureau of Labor Statistics, U.S. Department of Labor, U.S. Bureau of Economic Analysis, U.S. Treasury, Institute for Supply Management, University of Michigan, NFIB, Trading Economics