Dollar to Fall While Stocks Rise as Markets Digest Scary News Flow: Macro Week Ahead

Stock markets may build on last week’s explosive gains while the U.S. dollar falls as geopolitical and economic news stops getting worse while markets cheer central banks’ pivot away from interest rate hikes

• Markets may lift stocks and the Australian dollar if the RBA holds back a rate hike
• Chinese trade and inflation data need only be “tolerable” to lift financial markets
• For a pair of speeches from Fed Chair Powell, the mission now is to do no harm.

Stock markets roared higher last week as the geopolitical risk premium traders had embedded into markets amid the crisis in the Middle East began to recede. Meanwhile, the Federal Reserve signaled it is probably finished raising interest rates. The bellwether S&P 500 index added 5.76%, marking the largest weekly rise since June 2022.

Israel has stepped up efforts to destroy the Gaza-based Hamas, a terrorist group that launched an Oct. 7 attack that killed 1,400 civilians and took 240 hostages. However, gold has tellingly stalled while crude oil prices have drifted lower, signaling markets don’t expect new combatants to enter the fray.

Treasury bonds rose as the Fed’s messaging pushed yields lower across maturities. The biggest moves showed up in longer-dated maturities, with 30-year paper rising nearly 4%. The U.S. dollar slumped against its major counterparts, shedding 2%. That marks its worst performance in four months.

Here are the key macro waypoints for traders in the week ahead:

Reserve Bank of Australia monetary policy meeting

Australia’s central bank is narrowly expected to issue one final interest rate hike to top off the blistering tightening cycle started in mid-2022. Rates increased by a hefty 4% in just 11 months. The probability of parting 25-basis-point (bps) rise is priced in at 58%, giving the outcome narrowly better-than-even odds.

If recently installed Governor Michele Bullock opts to hold fire this time, she and her colleagues are seen delivering the increase no later than the Royal Bank of Australia’s (RBA’s) first meeting of 2024, in early February. The likelihood that the hike will happen at the intervening meeting in December is priced at 76%.

Leading purchasing manager’s index (PMI) data points to rapidly deteriorating economic conditions. The manufacturing and service sectors are shrinking at an accelerating pace and weak demand has made firms unable to pass through rising input costs. If this nudges the RBA to hold fire, traders will be keen to gauge the tone of the policy statement.

Guidance offering the usual tough talk on inflation but signaling an easing cycle is coming into view is likely to be cheered by stock markets. They have recently rewarded similar sentiments from central banks in Europe and the U.S. The Australian dollar is finding a way higher as capital flows search for bargains in battered corners of the markets where a policy lifeline seems closest at hand.

Trading China consumer price index data

A similar story is likely to play out as China’s trade and consumer price index (CPI) data cross the wires. Exports and imports are seen falling yet again, shedding 3.5% and 5% year-on-year respectively in October. The headline inflation measure is expected to register at -0.1% over the same period, pointing to continued demand of erosion.

Nevertheless, analytics from Citigroup suggests Chinese data outcomes now skew toward surprising on the upside relative to expectations. This may indicate markets have already priced in the bulk of the bad news about the country’s slow reopening after COVID-19 lockdowns.

Results need not be “good” in this case, with investors settling for “tolerable” to nibble on bargain-hunting opportunities in Chinese assets. Local markets have vastly underperformed U.S. analogs this year, and numbers suggesting conditions have stopped getting worse may encourage some catch-up gains.

Federal Reserve Chair Powell speaks

A pair of speeches from Fed Chair Jerome Powell are on the menu this week. Thursday’s appearance at the International Monetary Fund’s (IMF) annual research conference— the latter of the two— is likely to have more market-moving potential. Powell will take part in a panel on today’s global policy challenges and sit for a moderated Q&A.

At this stage in the cycle, Powell need only ensure that his comments do no harm by introducing fresh uncertainty into the U.S. policy outlook. This means that he is likely to echo sentiments on display following last week’s Federal Open Market Committee (FOMC) meeting.

That is, hikes are probably finished but there will be some delay before cuts begin, enabling the economy to absorb previous tightening. The markets read the outcome as implying cuts will come more quickly—now set to begin in June—and there will be more of them (at least 75 bps-worth). More of this “sooner and lower” perspective is likely to help Wall Street and weigh on the U.S. dollar.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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