That is not really a fancy title for this week's diary but more a reflection that in markets at this point it might be a good time to step back and "smell the roses"
We are heading into Thanksgiving week. It has been a long year and a very "choppy" three or four weeks.
Yields have moved a long way since mid-September and while I think they will likely move higher again (watching 109 on TY1, 4.47-4.48% on the US 10-year yield and 4.40-4.41% on the US 2-year yield) the next move needs a catalyst.
We could get that partly on a combination of a "thin Wednesday" with the release of Core PCE this week, 3rd December with the JOLTS release and 6th December with the Employment data.
In my view Jay clearly wants to pause now.
The ghosts of 2020-2021 still haunt him (transitory inflation) and he knows that the coming combination of fiscal and regulatory easing as well as Tariffs have shifted the landscape. He cannot admit it at this point, but he knows.
So, to pause in December he needs to frame it differently. He has already laid the foundation on his comments 2 weeks ago on PPI but he needs more. If the combination of the 3 data points above gives it to him, I think he will pause. If he does not have enough to work with, he may "punt" to January with a hawkish ease.
At this point I am biased towards a December pause and feel the support might come in the employment data on 6th December. Businesses and individuals know what's coming in terms of stimulus and they know it leading into the biggest spending period of the year- Into thanksgiving and then into Christmas.
It is worth noting in that respect that both in 2016 and in 2020 we saw the unemployment rate drop (From 4.9% to 4.6% in 2016 as NFP more or less met expectations at 178k versus 180k expected and from 6.9% to 6.7% in 2020 (was expected) with a weaker than expected NFP number)
You now have relative certainty of policies coming in that respect- and to individuals and businesses that makes a difference. The Equity market has done well since the election and looks likely to continue higher towards the Fed meeting as it did in both 2016 and 2020
As noted in my piece titled 75 And Pause- We Have Precedent , in the 7 easing cycles since 1987 we have seen the Fed pause after 75 bp's of cuts 5 times.
Of those 5 times, on 3 occasions the next move after the pause was a hike. The earliest we saw the Fed move after the pause was 12 weeks. So, if they pause in December (my bias) then absent a major new development they are not moving in January.
This backdrop together with the likely path of the ECB (and SNB as we saw guided last week) together with the prevarication of the BOJ is clearly USD supportive.
But the USD has come a long way in a short period of time and the EURUSD in particular is now overshooting the move seen on relative yields (10 year) ahead of a very big support area at 1.0340-1.0460.
Do I think it still heads lower? Yes. we got very bullish USD closes on Friday on the BBDXY, DXY and EURUSD to support that contention but again while yields are making up their minds, I would be more cautious next week (at least into PCE) in pushing the long USD trade.
I think there is a real danger of a short-term squeeze of USD long trades.
With this continued pause in yields and a pause in the USD (if seen) Equities should likely continue to "give thanks" into Thursday and Gold probably benefits also.
December seasonality is not great for the DXY which has fallen 7 Decembers in a row by on average 1.55%.
However, I am a believer that seasonality is an "all else being equal" trade and I am not sure that is where we are this year. I think the backdrop here has some similarities with both 2016 (election) and 2014 (yield differential) for EURUSD and those 2 years (along with 2001) are the only years in the last 25 years that has seen the DXY rally in every month in the last quarter
So bottom line I think the yield move is intact and the Fed could pause in December. If so, (or if in advance the market heads onto that page) then we should see the US 2-year yield break the 4.40-4.41% area and head into the 4.60's. I would also expect a break below 109 on TY1-
That will also likely set the platform for the next move higher in the USD
That along with tariffs could finally start to "gnaw at the edges" of what is becoming an overvalued Equity market- but that might be more a January picture.
But right here, right now I do not think in the near term that it will pay great dividends to be short FI, Long the USD or short equities and in particular trimming back short FI and long USD trades may be a prudent decision in the near-term