Image Source: UnsplashMARKETSOn Friday, the S&P 500 and Nasdaq Composite soared to new intraday highs, buoyed by November jobs data that struck a perfect balance—strong enough to signal a healthy economy but not too robust to sway the Federal Reserve from its anticipated rate cut later this month.The latest jobs report landed near economists’ predictions, suggesting the job market remains robust on the surface. However, beneath that, the details tell a mixed story. The unemployment rate unexpectedly edged up to 4.2%. In comparison, labour force participation dipped for a second consecutive month to 62.5%—a combination that raises eyebrows regarding the market’s health and could influence monetary policy considerations.Despite these concerns, average hourly earnings heated up, climbing 0.4% month-over-month against a 0.3% rise expectation. This marks the third time wage growth has hit this level in four months, indicating persistent wage pressures.In essence, the November jobs data present a nuanced picture: robust in parts but showing underlying softness, striking a “Goldilocks” balance—sufficiently strong to alleviate economic downturn fears yet mild enough to maintain the Federal Reserve’s leeway for a potential rate cut later this month and possibly into next year.
NUTS & BOLTSAmid the backdrop of Washington’s shifting corridors of power and the Fed’s rate slashes, a palpable revival in the ‘animal spirits’ of investors, employers, and consumers is taking hold, if only temporarily. In light of this resurgence, it’s no surprise the Fed has dialled back its rhetoric, adopting a more guarded stance on the trajectory of future rate reductions. This strategic pivot was underscored by a hefty 50-basis point cut in September, a proactive measure against the tightening grip of monetary policy, which, coupled with a surge in unemployment and a hiring freeze, threatened to throttle the labour market and stifle economic growth.The recent cascade of Fed rate cuts—three-quarters of a percentage point since September with an additional quarter-point on the horizon—has set the stage for a vibrant resurgence in consumer spending. Two recent data points have notably underscored this revival, illuminating the budding upside risks to consumer expenditure and economic growth that have been on the radar since the national election supercharged equity markets and risk appetites.Firstly, the auto industry delivered a jolt, with November’s total vehicle sales soaring to an impressive 16.7 million SAAR, marking a 3% increase from October and a robust 9% uplift since August. These figures represent the most vigorous monthly sales in over three years, an upswing that surprisingly coincided with stagnant financing costs—10-year Treasury yields have edged up over half a percentage point since September.Simultaneously, the housing market has defied the odds. Mortgage purchase applications have surged dramatically, up 23.5% in the past four weeks alone, with a 5.6% increase in the final week of November. This robust activity persists even as 30-year mortgage rates hover above 7%, debunking the notion that high rates deter eager homebuyers.This year, the holiday shopping season erupted into a spectacular frenzy, with Black Friday weekend smashing all previous records. As Adobe Analytics had predicted, online sales skyrocketed to an eye-popping $41.1 billion, signalling robust consumer confidence. The shopping hysteria didn’t stop there; the National Retail Federation reported an extraordinary surge in activity, with around 197 million shoppers diving into both online and brick-and-mortar deals, far surpassing earlier forecasts. Adding to the festivity, Mastercard’s Spending Pulse captured a thrilling 14.6% surge in online sales over the previous year, while the broader U.S. retail landscape, autos aside, enjoyed a solid 3.4% increase in sales. This electric atmosphere in shopping districts and digital storefronts marks a holiday season that dazzled and delivered significant economic cheer.Stock investors are not less enthusiastic as US shoppers. The S&P 500 ascended to new heights, accumulating $10 trillion in market capitalization since early August and marking a staggering year-over-year growth of 34%. Over the past two years, this explosive increase in equity wealth has cushioned consumers against the dual pressures of rising interest rates and inflation, enabling sustained robust spending and keeping the proverbial ‘animal spirits’ alive ’ in the marketplace.
FOREX MARKETSUSDJPY IN PLAYIn the high-stakes currency casino, the yen’s failure to decisively break below the 149 mark this week casts shadows over the likelihood of a Bank of Japan rate hike this December. Despite dipping my toes in the market at 150.50 and 150.60, I did bag profits( leaving 35 % open) as the pair stubbornly failed to take on 149.50 convincingly after the NFP, hinting that I might be misinterpreting the Japanese market tea leaves despite wage growth indicators that seemed to scream “hawkish.”Governor Ueda tantalized the markets earlier this week with hints that a BOJ rate hike might be imminent, potentially landing as soon as this month or in January. However, he stopped short of a definitive commitment to a December hike, citing the need to assess a slew of upcoming data. This leaves traders in a suspenseful “data-dependent” mode. Ueda subtly indicated that if the forthcoming data were to support a hike, the markets might be tipped off via a strategic media leak ahead of the BOJ’s critical meeting on December 19th. This scenario supports maintaining a short position on USDJPY, providing a tactical hedge against this looming tail risk.The impending Tankan survey is set to play a decisive role in the BoJ’s decision on the impending rate hike. This critical report could be the decisive factor, following hot on the heels of wage data that strongly supported a potential hike. Meanwhile, U.S. yields have seen a downturn following the recent jobs report, indicating that while the data was robust, it wasn’t compelling enough to shift the Fed’s course toward a pause. The 10 % jump in the December Fed rate cut odd, a subtle market shift that should have ideally bolstered the Yen’s position. Yet, the closing figures fell short of my expectations( near 149), hinting at underlying market dynamics that might not be immediately apparent.Suppose the upcoming Tankan survey underscores robust inflation expectations. In that case, it might fuel the Bank of Japan’s inclination toward a rate hike, setting the stage for a potential decline in USD/JPY as the year-end draws close. While we think the top side momentum is USD/JPY is capped into the year-end, it may offer a prelude to a significant rally for the yen if signals emerge—perhaps through a strategic leak to the Nikkei Press next week—that a rate hike is indeed forthcoming. This scenario would mark a pivotal turn in monetary policy that could significantly impact currency markets.THE ECB SET-UPThe Euro has shown surprising tenacity this past week, effortlessly bouncing from its nadir at 1.0335 back to a sprightly 1.0600, undeterred by France’s political drama. This rebound likely prompted a flurry of short covering in EURUSD and EURJPY positions as traders recalibrated ahead of a pivotal ECB rate decision. On deck next week is a critical assembly where ECB’s luminaries will unfurl their latest economic projections. The trading floor is abuzz, betting on only marginal tweaks to growth and inflation outlooks, suggesting a conservative pivot in policy adjustments.What revelations will President Lagarde unveil on December 12? Despite some divergence in the ranks—ranging from the dovish clamours of Greece’s Yannis Stournaras to the hawkish echoes from Austria’s Robert Holzmann—the ECB seems unified in its trajectory towards rate reductions over the next year. But the timing and cadence of these cuts remain the million-euro question.As whispers of a 25 basis point cut in December grow louder—potentially marking the fourth cut this year—the case strengthens amid a backdrop of decelerating growth and jittery inflation levels. Recent choruses from the ECB’s corridors hint at a consensus tilting towards easing. Vice-President Luis de Guindos subtly noted that while monetary paths are clear, they’re intricately tied to the whims of inflation.But as we peer into 2025, the plot thickens. The ECB’s narrative is tinged with words of caution and prudence, advocating a measured approach amidst a cacophony of economic uncertainties. A forecasted 100 basis points slash in rates next year could rejuvenate GDP. Yet, the shadow of economic instability looms large over Europe, with Germany and France grappling with internal strife and Italy under the fiscal microscope.Adding a dash of spice to this complex brew is the looming specter of a trade war with the U.S. under Trump’s administration— and a possible curve ball in waiting if he is seen less as the ‘Tariff Man’ and more as the ‘Deal Maker in Chief’. An evolving dynamic promises to reshape the economic and trading landscapes, offering a tapestry of risks and opportunities as we sail into the new year. The dialogue and strategies will unfold in our upcoming FX reports, setting the stage for a riveting 2025 in the world of currency trading.
CHART OF THE WEEKChina’s stimulus may partially offset US tariffs in 2025Goldman Sachs Research forecasts that China’s economic growth will decelerate in 2025, slowing to 4.5% from 4.9% in the previous year. This anticipated slowdown comes as the new US administration, led by President-elect Donald Trump, is expected to impose a steeper tariff regime on Chinese imports. Specifically, they anticipate a 20 percentage-point increase in the effective tariff rate on Chinese goods, projecting this will directly subtract 0.7 percentage points from China’s GDP growth in 2025.In response to the looming threat of heightened US tariffs, Chinese policymakers are likely to roll out a series of stimulus measures aimed at cushioning the blow to their economy. These efforts are expected to support domestic growth by stimulating internal demand and encouraging investment in key sectors, thereby partially offsetting the adverse effects of the US trade barriers. However, the extent to which these interventions can mitigate the impact of the tariffs will be crucial for sustaining China’s economic momentum amid escalating global trade tensions.

“The choice in front of Chinese policymakers is simple: either to provide a large dose of policy offset or to accept a notably lower headline real GDP growth,” Chief China Economist Hui Shan writes in the team’s report. “We expect them to choose the former.”More By This Author:The Cautionary Canary Makes An Appearance Ahead Of NFP
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