A look at the day ahead in the US and global markets by Mike Dolan
The dollar continues to rise on a fearful rise in US Treasury yields ahead of the election, posting its best levels in almost three months against the euro and yen on starkly contrasting economic and interest rate pictures.
With the International Monetary Fund’s annual meeting underway and G7 financial leaders and central bankers gathering, the exceptional performance of the US economy was underlined in the IMF’s updated global forecasts on Tuesday.
The IMF once again revised upward its US GDP growth forecasts for 2024 and 2025, by two-tenths of a percentage point to 2.8% for this year and by three-tenths of a point to 2.2% for 2025.
While global growth forecasts are little changed overall, the US GDP outlook for this year and next year has now risen by a cumulative 0.7 and 0.5 points respectively since January. And only Canada of the G7 is expected to grow faster than the United States next year.
With surprise US economic indexes at their most positive since April, conditions like this partly explain the sharp rise in Treasury yields this month and the rising terminal rate for Federal Reserve dovish expectations.
The other driving force behind both Treasury yields and the dollar is the approach to the November 5 election, with betting markets now heavily tilted towards a win for Republican Donald Trump, despite some concerns about distortions and manipulation by small groups of gamblers with big pockets.
Trump’s tax cuts and tariff plans, along with mounting speculation about a Republican clean-up in Congress, have made investors nervous about the impact on the US budget deficit already at 6.4% of GDP, as well as on domestic inflation and foreign growth .
With a 20-year bond auction waiting in the wings on Wednesday, 10-year yields hit their highest level since July and are now up 25 basis points in just a week at 4.24%. The New York Fed’s estimate of a “term premium” on 10-year Treasury notes – a measure of compensation for risk investors’ demand to hold long-term debt – topped 20 basis points for the first time this year.
And yet election bettors may still be a little wary of whiplash – not least given the dramatic change in fortunes and opinion polls we’ve already seen over the summer.
Opinion polls still do not indicate a concrete result, the latest Reuters/IPSOS poll this week still puts Democrat Kamala Harris three points ahead nationally and other polls show a dead heat in the swing states.
Nevertheless, the image of the dollar after the elections is in any case very flattered by the interest rate prospects abroad.
The Bank of Canada is expected to cut rates again by up to 50 basis points later on Wednesday.
And the euro was also hit on Wednesday by a Reuters source story that said European Central Bank policymakers began debating whether to cut interest rates enough to start stimulating the economy.
This suggests that ECB interest rates may return to below ‘neutral’ estimates (currently estimated at somewhere between 2% and 2.5%) and is in stark contrast to increasing assumptions of a US ‘end rate’ around 3.5%.
The yen, meanwhile, continued to weaken beyond 152 per dollar for the first time since July, ahead of this weekend’s elections in Japan.
Arguments in the interest rate markets have sent a shock across the bows of the lofty stock markets this week, with Wall Street indexes stalling on Tuesday and futures back in the red on Wednesday ahead of the bell.
In the background, earnings season is in full swing, with Tesla (NASDAQ:), Boeing (NYSE:) and IBM (NYSE:) will top a packed agenda later today.
In Europe, shares of Deutsche Bank fell back to 3% after the German banking giant raised its forecast for loan loss provisions against the backdrop of a weak German economy – even as the company returned to profits in the third quarter and cut reserves for lawsuits from investors over the crisis. its Postbank Division.
And shares of McDonald’s (NYSE:) fell nearly 6% in premarket trading after an E. coli outbreak linked to the restaurant chain’s Quarter Pounder burgers resulted in the death of one person and sickened 49 people in the USA
Key developments that should give more direction to US markets later on Wednesday:
* Bank of Canada policy decision, Governor Tiff Macklem press conference
* US Existing Home Sales in September, Federal Reserve Releases Beige Book on Economic Conditions, Eurozone Consumer Confidence in October
* G7/G20 financial leaders meet at the annual meetings of the International Monetary Fund and World Bank in Washington, including speaking engagements with Kazuo Ueda, Governor of the Bank of Japan, Andrew Bailey, President of the Bank of England, Christine Lagarde , President of the European Central Bank and Philip Lane, Chief Economist of the ECB. and German Finance Minister Christian Lindner
* Federal Reserve Board Governor Michelle Bowman and Richmond Fed President Thomas Barkin speak
* US corporate profits: Tesla, Boeing, IBM, Ameriprise, Northern Trust (NASDAQ:), AT&T (NYSE:), Boston Scientific (NYSE:), General Dynamics (NYSE:), Thermo Fisher Scientific (NYSE:), Coca Cola, Nextera Energy, Hilton Worldwide, United rental (NYSE:), O’Reilly (NASDAQ:) Automotive, Lam Research (NASDAQ:), Newmont, The Las Vegas Sand (NYSE:), Rollins (NYSE:), Align (NASDAQ:) Technology, CME etc
* The US Treasury Department is auctioning $13 billion worth of 20-year bonds
(By Mike Dolan,; mike.dolan@thomsonreuters.com)
