On Tuesday, U.S. Treasury yields and the dollar index fell to their lowest levels in months following dovish comments from Federal Reserve Governor Christopher Waller. The yield on the two-year US Treasury note, which correlates with expectations for the Fed fund rate, hit 4.75%, its lowest level since August 10. The US Dollar Index, also influenced by monetary policy expectations, reached its lowest level since August 11. Despite earlier declines, stocks rebounded, with the S&P 500 closing up 0.1% and the Nasdaq Composite up 0.3%.
So far this week, the U.S. equity markets have been treading water as investors appear to be wary of taking too much directional action ahead of the slew of early December economic data. For this week, that would include Thursday’s PCE inflation release and Friday’s ISM manufacturing index.
With equities failing to fire up crosses and momentum, traders continue to pile into the path of least resistance trades. On Tuesday, the dollar hit a three-month low after Waller’s dovish comments. U.S. Treasury yields fell as investors became more confident that the Federal Reserve will begin cutting interest rates by mid-2024.
Normally, lower interest rates would be a welcome sign for equities as the pressure from high yields eases. But given the widely divergent economic narratives around 2024 expectations, there’s also a lingering fear that a weakening economy could be what drives those cuts. As such, selling the dollar and buying gold makes sense in the eyes of many investors, especially as the market gets a dose of rate-cut confirmation bias from Fed Waller, a hawkish and influential voice at the central bank. Indeed, dollar bears are having a field day with a Fed hawk now roosting with the doves.
As investors await news on inflation and business sentiment, the focus remains on the U.S. consumer after the Black Friday and Cyber Monday shopping bonanza. The Conference Board’s consumer confidence survey rose to 102.0 from 99.1 a month ago, beating expectations and providing some support to the soft landing camps. Arguably, the reliability of survey data has become more of an issue in the post-pandemic era as seasonal adjustments remain skewed and the number of survey responses continues to decline.
While the weaker US dollar and lower interest rates are likely to encourage investors to return to the oil markets, the focus remains on OPEC. With some OPEC members showing less compliance, maintaining the current production cuts is likely to be a major topic of discussion at Thursday’s OPEC+ meeting. The prevailing sentiment is for an extension of individual cuts by Saudi Arabia and Russia to at least the first quarter of 2024, along with the group maintaining its existing cuts. However, oil prices are finding a bid on speculation that an additional modest backstop cut may be considered during the discussions.
