Michael Reinking:
Hello, I'm Michael Reinking, Senior Market Strategist at the New York Stock Exchange, and this is Market Storylines. Every week we are here to keep you up to date on the key trends and events driving global markets. We are recording on Thursday afternoon, and here are this week's market storylines.
Now, this week there have been two areas of focus for financial markets. Investors continue to digest the implications of last week's election as President-elect Trump has been expeditiously making appointments to his cabinet. And secondly, incoming economic data, which will shape the path of monetary policy going forward and that's where I'll start. Now, this week's inflation data has been mixed with Wednesday's CPI report spot-on with expectations while this morning's PPI report came in slightly hotter than expected. Now all in all, that data was slightly disappointing as it suggests that the dis-inflationary process is stalling, but at this point, it's also not pointing to a re-acceleration.
Now, this week's initial claims improved falling to 217,000 while continuing claims held around unchanged just under 1.9 million. Now, treasury yields are higher this week, but that is happening primarily in the long end of the curve with both 10 and 30-year yields up over 10 basis points retesting the post-election highs. Now, as Chair Powell highlighted last week in his press conference, it's hard to parse what is driving the move higher in yields. From my perspective, I think much of what is happening is a re-pricing within the market for fewer rate cuts heading into next year.
Now, we have heard from multiple Fed officials this week who have all seemed to highlight that given the current backdrop, there are two-sided risks. Now, officials have said they are really relying on incoming data to make decisions going forward, maintaining as much optionality as possible. However, there have been a couple officials that have suggested that the long-run neutral rate or that theoretical rate that it neither slows or accelerates the economy is higher. And notably, Dallas Fed President Lori Logan said that the Fed funds rate may actually be close to that neutral rate, suggesting that the Fed should be cautious with further rate cuts.
Now, markets still seem to think a December cut is on the table, but only see two additional cuts next year, which is much higher than the 3.4% in the Fed's last summary of economic projections, which was released in September. Now later today, we will hear from Fed Chair Powell and investors will pay close attention to his commentary around inflation. After this week's data, I don't think we'll hear much of a shift from what we heard at last week's FOMC policy meeting, but from my perspective, the labor market data at the beginning of December will be the key as to whether the Fed cuts rates next month. On the topic of the neutral rate, New York Fed President Williams, who has been a prominent voice on that topic, is also speaking on Thursday evening.
Now, the implications of last week's election continue to drive the activity in global financial markets. The U.S. Dollar Index has continued to move sharply higher, hitting 107 overnight, the highest level going back to October of last year, which was before the Fed pivot. Now, part of this is being driven by the interest rate differentials with the move higher in rates, which I just discussed, but there is also the expectation that the institution of tariffs could have an impact on global growth. Now, China hawks Marco Rubio and Mike Waltz have both been tapped for positions in the administration keeping China at the center of that conversation. Now, local markets there have been under pressure since last week, and there was also some disappointment that there wasn't a bigger stimulus package announcement at the conclusion of last week's National People's Congress. Many have argued that the government is keeping some dry powder waiting to see what the ultimate policy stance is.
Now the mix of China concerns and U.S. dollar strength is weighing on emerging markets and commodities. And notably gold, which has been one of the best performing assets this year, hit 2,550 earlier today, down nearly 10% from its all time high hitting late October, while other base metals have also been under pressure. Now within U.S. equity markets, this has largely been a week of consolidation after the post-election served last week, earlier this week, the S&P 500 closed above 6,000 for the first time and has continued to hover just below that level.
Now broadly, the Trump trades continue to work. Small and mid-cap stocks continue to rally earlier in the week, but have backed off with the move higher in treasury yields and financials have proceeded to be the upside standout. Now, one new wrinkle this week is weakness within companies that are exposed to government spending with the appointment of Elon Musk and Vivek Ramaswamy to head up the newly formed Department of Government Efficiency or DOGE for short, though it doesn't seem like this agency will have an authority to make changes.And speaking of, at this point, I'd be remiss to move on without talking about the parabolic move higher in cryptocurrencies with Bitcoin hitting new all time highs, trading above $90,000.
Now as we start to look ahead, Friday is setting up to be a big day overnight. That's a round of economic data in China, including industrial production and retail sales. There have been some slightly encouraging signs that stimulus is having a positive impact recently. Those same pieces of data will be released in the U.S. ahead of the open. Now, keep in mind, tomorrow is also options expiration, so expect volumes to be heavy, and this could add to some volatility around the open and the close. With the unwinding of hedges post-election, there has been vol crush with the VIX falling back to around 14, and it'll definitely be interesting to see how this evolves post expiration next week with much of that exposure rolling off.
Now next week, Washington will continue to be in focus. The economic calendar is a bit lighter with global inflation data and the S&P Global Flash PMIs are the key highlights. Earnings will also move back into the spotlight with key retail and tech earnings, including Walmart and Nvidia. So that's going to do it for this week. Once again, thank you for spending some time with us today. Remember, you can watch Market Storylines on TV.NYC.com or on the NYC YouTube channel. Or you can listen every Friday on the Inside the Icehouse podcast feed. Thanks for joining me. I'm Michael Reinking. I'll talk to you again next week.
Speaker 2:
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