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

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

On Friday, US Treasury Secretary Janet Yellen also delivered a statement. Yellen said,

“I don’t believe it’s becoming embedded in the US economy. The way inflation would become embedded is if you saw expectations of inflation over the medium term rising to levels that are inconsistent with 2% inflation, and then those higher inflation expectations being built into wages and prices.”

The Wall Street Journal Report and Yellen and Daly’s comments came before the FOMC entered its blackout period, which extends until November 3.

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

This morning, the Hang Seng was up 2.07%, with the ASX 200 ending the day up 0.50% on hopes of a less hawkish Fed. The US futures are pointing to a bullish open. The Dow Mini is up 204 points, with the S&P 500 Mini and NASDAQ Mini in positive territory ahead of the European open.

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

Weak US Economic Indicators Have Reinforced Fed Pivot Bets

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

However, US economic indicators over the remainder of the week could materially impact sentiment towards the Fed pivot.

Today, Q3 GDP and weekly jobless claims will draw plenty of interest. While US labor market conditions remain an area of focus, the GDP numbers could decide how much wriggle room the Fed has to front-load rate hikes before labor market conditions weaken materially.

Tomorrow, Michigan State Consumer Sentiment, Core PCE Price Index, and personal spending figures will also influence market sentiment.

With no FOMC members able to guide the markets, better-than-expected Q3 GDP numbers, a pickup in inflationary pressure, a fall in jobless claims, and an increase in personal spending could test the Fed pivot theory.

Therefore, we expect increased market volatility over the next two days, with stats in favor of a Fed pivot likely to see the DXY slide to sub-109.

This morning, the FedWatch Tool had the probability of November and December rate hikes at 90.3% and 35.8%, respectively. One week ago, the likelihood of a 75-basis point hike in December stood at 75.4%.