The Markets Are Betting Big on a Fed Pivot Ahead of US Q3 GDP Numbers

It’s a big day ahead for global financial markets. Last week, the Wall Street Journal reported that the Fed plans to take its foot off the gas in December. The report echoed comments from FOMC member Mary Daly, who reportedly said it was time to consider slowing the pace of rate hikes, which should avoid sending the economy into a Fed recession.

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US Treasury Secretary Janet Yellen also made a statement on Friday. Yellen said,

“I don’t believe that’s the case in the U.S. economy. The way inflation is going to play out is if you’ve seen inflation expectations in the medium term rise to levels that are inconsistent with 2% inflation, and then those higher inflation expectations are made into wages and prices.

The Wall Street Journal report and Yellen and Daly’s comments came before the FOMC entered its blackout period, which runs through Nov. 3.

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As of Friday, economic indicators have revealed cracks in the US economy, supporting prospects for a Fed pivot.

This morning, the Hang Seng was up 2.07%, with the ASX 200 up 0.50% for the day on expectations of a dovish Fed. US futures are showing a marked recovery. The Dow Mini is up 204 points, with the S&P 500 Mini and NASDAQ Mini in positive territory ahead of the European open.

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The change in sentiment led the Spot Dollar Index (DXY) back to sub-110 and EUR/USD to parity.

271022 EURUSD Daily Chart

Weak US Economic Signs Bolster Fed Pivot Bets

Those betting on a Fed pivot are on the right side of the trade this week. October’s preliminary private sector PMIs, consumer confidence, and housing sector data give reason to believe that the Fed’s efforts to cool the economy are working.

However, US economic indicators at the end of the week could have a material impact on sentiment on the Fed’s pivot.

Today, Q3 GDP and weekly unemployment claims will attract a lot of attention. While US labor market conditions are a key area, GDP numbers could decide how much wiggle room the Fed has to raise rates first before labor market conditions weaken materially.

Tomorrow, Michigan State Consumer Sentiment, the core PCE Price Index, and personal spending numbers will also weigh in on market sentiment.

While no FOMC members can guide the markets, better-than-expected Q3 GDP numbers, picking up inflationary pressure, falling jobless claims, and rising personal spending could test the Fed’s pivot theory.

Therefore, we expect increased market volatility over the next couple of days, with statistics in favor of a Fed pivot likely to push the DXY below 109.

As of this morning, the FedWatch tool had a rate hike probability of 90.3% and 35.8% for November and December, respectively. A week ago, the probability of a 75-basis-point increase in December was 75.4%.


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