Attention this week will focus on the US presidential election, but the upcoming November decision by the Federal Reserve Open Market Committee (FOMC), which will be announced less than 48 hours after the closing of the election polls, will also be significant for market participants.
Key points:
– The Fed should cut interest rates by another 25 basis points.
– A 50 basis point cut is virtually ruled out after the underestimation of inflation in the US.
– Election results blur the direction of FOMC policy.
– Pro-inflationary Trump could mean a hawkish Fed.
– Weak NFP report suggests caution.
– Powell is unlikely to provide clear forward guidance.
Donald Trump appears to have a slim lead ahead of Tuesday’s election, but the minimal difference in polls suggests that the election will be very tight and the outcome is almost like a coin toss. This results in significant uncertainty ahead of the Federal Reserve’s November meeting. A 25 basis point interest rate cut on Thursday (11/07) is, in our opinion, certain, however, its further path may largely depend on who becomes the next president – Trump is perceived as pro-inflationary, while Harris should largely maintain the status quo.
The October NFP (nonfarm payrolls) report further increased uncertainty, making it difficult to predict the outcome of Thursday’s meeting. At first glance, it was disastrous. The increase in jobs last month not so much slowed down as completely collapsed, falling to the lowest level since December 2020 of the pandemic (+12 thousand.). However, the markets are aware that this employment decline may be partially related to transitional factors, especially the impact of hurricanes Helene and Milton, and not to be clear evidence of problems in the labor market.
The Labor Statistics Office did not provide details on the scale of employment problems caused by hurricanes, which means that drawing any significant conclusions would be premature. Given this, we do not believe that the Fed will react to the weak report with a larger cut or a more dovish tone of announcements. Market bets for a second consecutive 50 basis point interest rate cut have completely evaporated in recent weeks, especially after the underestimation of the core September inflation, which unexpectedly rose to the highest level in three months.
Currently, in the fed funds futures contracts, the probability of continued cuts in December is about 80%. However, this will largely depend on the outcome of the election. We believe that investors will almost surely be pricing in a more shallow cycle of Fed monetary policy easing cuts if Trump wins, particularly if Congress is taken by the Republicans. Markets would then be preparing for lower domestic taxes, greater protectionism and higher inflation in the US. The rise in yields of US government bonds, which we have observed since the beginning of October, can partly be associated with the very “Trump trade”.
In this week, the Federal Reserve will not publish new macroeconomic projections or a dot plot. This will give FOMC members time to digest the election result, which can be perceived positively. However, we will not have to wait long for them – they will be published at the next meeting in December. On Thursday, additional significance will be given to the comments of Chairman Jerome Powell. He is likely to once again highlight the resilience of the US economy and may also confirm that the recent overestimation of job growth was related to transitional factors. However, we believe that he is unlikely to provide clear forward guidance, even in the event of a Trump victory, which in our opinion would raise serious doubts about the December cut.
The decision on FOMC policy will be announced on Thursday (11/07) at 8:00 PM, and Chairman Powell’s press conference will start 30 minutes later.
Source: https://managerplus.pl/wybory-w-usa-i-decyzja-fomc-kluczowy-tydzien-dla-rynkow-finansowych-35896
