A look at the day ahead in European and global markets from Wayne Cole
Asia has been dominated by the market reaction to the choice of fund manager Scott Bessent as incoming U.S. Treasury Secretary, with the main feeling one of relief that he’s a mainstream candidate rather than an unknown.
The fact that Bessent talks like a fiscal hawk was enough to push 10-year Treasury yields down by 6 basis points, though whether he will be able to trim deficits while rolling over due-to-expire tax cuts remains to be seen.
In various media appearances he has talked of cutting the budget deficit to 3% of GDP and dealing with the mountain of U.S. debt, apparently by slashing spending and lifting economic growth.
Sceptics would note the U.S. has had strong growth for some time and the deficit has only got larger, while the amount of discretionary spending there is to cut is trivial compared with the essential stuff such as Medicare and defence.
Bessent has spoken in favour of tariffs, suggesting they should be objectives “layered in gradually”, while the levels of tariffs being mentioned, such as 60% on Chinese goods, were “maximalist” positions that might be watered down.
He has also voiced support for a strong dollar, seemingly leaning against President-elect Donald Trump’s previous dalliance with devaluation as a way to curb trade deficits.
Thus, while the dollar has dipped today in line with bond yields, the longer-term bull argument appears intact.
The dollar has been underpinned by the divergence in economic performance between the U.S. and Europe, a point driven home by last week’s PMIs.
Markets are fully priced for a quarter-point cut from the ECB next month, and imply almost a 58% chance it will ease by a full 50 basis points on Dec. 12. Wagers on the Fed have gone the other way, with the probability of a rate cut in December shrinking to 52%, from atop 70% a month ago.
The market has only 65 bps points of Fed easing priced in by the end of 2025, compared with 154 bps for the ECB.
The odds will be further refined this week by the tone of the minutes of the Fed’s last meeting, along with October inflation figures from the United States and Europe.
U.S. core PCE inflation is seen rising a tick to 2.8%, though in part due to higher costs for financial management that reflect the surge on Wall Street, rather than demand in the economy.
EU inflation is also expected to nudge higher on base effects as a fall in the CPI from last year drops out of the calculation.
Note there are no Fed speakers scheduled this week, presumably because of the U.S. Thanksgiving holiday, but plenty of ECB and BoE officials are on the menu.