Macro Week Ahead: Will the dollar keep rising as the U.S. economy leaps ahead of the rest?
Macro Week Ahead: Will the dollar keep rising as the U.S. economy leaps ahead of the rest?
By:Ilya Spivak
Can the world economy hold up if U.S. strength brings higher interest rates for everyone?
- The markets seem to be lining up for reflation and higher interest rates.
- The Bank of Canada update might offer clues about U.S. economic trends.
- S&P Global PMI data to show the U.S. diverging from other economies.
Wall Street shifted into a lower gear last week. The bellwether S&P 500 index rose 0.8% and while the tech-tilted Nasdaq 100 added just 0.2%, following gains of 1% and 1.1% respectively in the previous week. The bond market idled, with yields inching a hair lower after four weeks of gains.
The U.S. dollar was undeterred, however, rising for a third week straight. Nevertheless, gold prices continued to push upward, scoring their best performance in five weeks. Crude oil plunged 9.1% amid seemingly cooling fears about direct military escalation between Israel and Iran.
Taken together, all this seems to distill into a tale about a Federal Reserve that will be too slow to respond to reflation. A parallel rise in gold and the greenback alongside a yield curve hovering near its steepest setting in over two years suggests markets foresee a hamstrung central bank in 2025 after it cuts rates in November and December of this year.
Against this backdrop, here are the macro waypoints likely to shape what comes next.
Bank of Canada (BOC) interest rate decision
Canada’s central bank is expected to deliver the equivalent of three 25-basis-point (bps) rate cuts over its remaining two meetings in 2024. That breaks down to 50bps priced in for this week’s rate decision, followed by 25bps more in December. The outsized move follows a sharp drop in inflation amid an ongoing contraction of economic activity.
An updated set of economic forecasts will be closely watched. Canada’s economy is typically tied at the hip with that of the U.S. because the latter soaks up nearly 80% of former’s exports. The two have strayed recently however, with the U.S. outperforming by a wide margin. Traders will be keen to gauge which way the two might re-converge.
S&P Global purchasing managers index (PMI) data
An update on global growth trends will come by way of October’s purchasing managers’ index (PMI) surveys covering most major economies from S&P Global. The numbers are expected to show a resilient U.S. continues to defy deterioration elsewhere. The Eurozone is seen contracting for a second month and at a faster rate.
This will raise an important question for investors. If the trend in U.S. growth, inflation and interest rates continues to diverge from the rest, economies outside the North American giant will find themselves facing higher borrowing costs at precisely the wrong time.
That’s because the Fed largely sets the trend for the price of global credit because it is toggling the cost of loans in the world’s ubiquitous settlement currency, the U.S. dollar. If Fed Chair Jerome Powell and company find they are unable to ease with gusto as a strong economy revives inflation, the lagging economies beyond U.S. shores will be doubly burdened.
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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