U.S. presidential election, Fed rate decision, RBA and BOE meetings: Macro Week Ahead

Stocks, bonds and gold may fall together if U.S. election uncertainty persists

• Stocks and bonds may fall together on uncertainty about the U.S. election outcome.
• The Fed will cut rates again, but markets are likely to focus on guidance.
• Dovish RBA and BOE commentary might provide a lift to the U.S. dollar.

A now-familiar dynamic weighed on Wall Street last week as interest rates continued to march higher. Two- and 10-year Treasury rates rose in tandem, with a bit more action at the long end driving a slight steepening of the yield curve. The benchmark S&P 500 shed 1.5% while the tech-tilted Nasdaq 100 lost 1.7%.

Gold prices and the U.S. dollar were little changed against this backdrop. The yellow metal took a minor step lower from record highs, down 0.2%. The greenback diverged vs. its major counterparts, falling against the euro but gaining ground against the British pound and the commodity currencies, the Australian and Canadian dollars.

Against this backdrop, these macro waypoints are likely to shape what comes next.

U.S. election uncertainty may see stocks and bonds fall together

The U.S. presidential election makes for an obvious focal point on this week’s calendar. National opinion polls aggregate to a tie, according to data from Real Clear Politics. Betting markets have swung toward a similar conclusion in the past week, having previously favored Republican Donald Trump over Democrat Kamala Harris.

For traders, zooming in on the outcome as binary event risk rather than through the prism of eventual governing style and policy prospects seems most practical. On balance, the degree of post-election uncertainty is likely to define price action. Stocks may be hurt as yields rise if the result is unclear or contested within 24-48 hours of the polls closing.

Will the Federal Reserve embrace strong U.S. economic data?

The markets are overwhelmingly tilted in favor of a 25-basis-point (bps) interest rate cut from the Federal Reserve. The probability of another such move in December stands at a commanding 81.7%, implying that traders expect the U.S. central bank to deliver on the forecast unveiled in September.

This probably means that the markets perceive a degree of “autopilot” at play until the calendar turns to 2025. Nevertheless, traders will be keen to weigh up how the central bank frames the run of hotter-than-expected U.S. economic data on offer since the rate-setting Federal Open Market Committee (FOMC) gathered six weeks ago.

For their part, the markets have reckoned that these upbeat results speak to upward pressure on inflation, guiding Treasury bond yields and the U.S. dollar higher in anticipation of a hawkish adjustment that limits next year’s rate cut path. 73bps are now priced in—a full cut less than Fed officials have projected.

Dovish RBA, BOE guidance may offer a lift to the U.S. dollar

The U.S. dollar may find its way higher as central banks in Australia and the U.K. tilt toward the dovish end of the spectrum with their policy updates this week. The Reserve Bank of Australia (RBA) is expected to keep its target interest rate at 4.35%, while the Bank of England (BOE) is seen cutting by 25bps to 4.75%.

Both of those outcomes are heavily priced in and so may not have much to offer by way of directional inspiration for the markets. Downbeat growth dynamics for both economies since mid-year may inspire policymakers to adopt a more accommodative posture in official commentary, however. That may hurt the Australian dollar and British pound.

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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