Fed rate cut bets get a boost, but risk appetite only mildly lifted

December rate cut is back on the table

Risk sentiment has gotten off to a mostly positive start on Monday, as investors digest Friday’s comments by New York Fed President John Williams, who revived hopes of a December rate cut. Speaking in Chile, Williams said he sees “room for a further adjustment in the near term to the target range for the federal funds rate”. Investors immediately ratcheted up their bets that the Fed will trim interest rates again in December, pushing up the odds from less than 30% to almost 60%.

Williams, who is the Vice Chair and permanent voting member of the Federal Open Market Committee, is regarded as a close ally of the Fed chair, Jerome Powell. So, his openness to a rate cut next month suggests Powell could also back such a move should he end up with the casting vote in the event of a 50/50 split.

Driving in the fog

However, with the hawkish voices far louder than the dovish ones in recent weeks, the December vote may not be as tight as a lot of investors currently perceive. The decision likely rests with those officials that are currently sitting on the fence, but in the absence of crucial data, there isn’t a whole lot on the agenda before the December meeting that could sway them towards a cut.

The releases of the Q3 GDP and October PCE inflation reports, which were due this week, just got pushed back to a yet unannounced date. The November jobs report has been delayed until December 16. Hence, other than the surveys, there’s very little hard data that’s on the way apart from tomorrow’s PPI and retail sales figures, which will not matter much as they are both for September.

All this corroborates Powell’s dilemma of “driving in the fog”, which is why a lot of policymakers would be more comfortable staying on hold in December. And this is even more true after Friday’s flash PMI numbers pointed to solid growth in business activity in November.

Sentiment remains fragile in equities

This probably explains why there was only a tepid rebound on Wall Street on Friday. The S&P 500 closed higher by almost 1% but the Nasdaq 100 couldn’t even manage that, settling for a 0.9% gain. Small caps, which are more sensitive to interest rates, outperformed, with the Russell 2000 index rallying by 2.8%.

Equities globally are mostly positive today, but only cautiously, as sentiment remains fragile amid the persisting worries about AI valuations. Not even reports that the Trump administration is considering reversing its ban on Nvidia to sell its most advanced H200 chips to China are able to re-energize the bulls. 

Cryptos have also been unable to turn things around, with yesterday’s bounce back proving short lived. Bitcoin is down more than 2% today, resuming its near seven-week pullback.

Dollar holds firm as yen slips again

As for the US dollar, it’s only modestly come under pressure from Williams’s comments, despite a notable drop in Treasury yields, and although it did tumble against the yen on Friday, this was due to intervention fears lifting the yen rather than dollar weakness.

But the yen is on the back foot again today, with traders testing the resolve of the Japanese government to prevent ‘one-sided’ moves by intervening in the FX market. The language from the new finance minister, Satsuki Katayama, has been getting stronger in recent days, while quietly endorsing the Bank of Japan’s plan to gradually tighten monetary policy.

Still, investors don’t see a rate hike before the March meeting next year, when policymakers will have a better idea of the pay increases to be agreed in the Spring wage negotiations

The biggest risk in the coming days is that the yen could come under attack towards the end of the week when liquidity is expected to dry up due to the Thanksgiving break in the United States. Alternatively, Japan’s finance ministry may decide to take advantage of the low liquidity by intervening when most US traders are away from their desks, in its bid to stem the yen’s decline. This would especially be true if the yen were to sink to the 160-yen region.

Pound eyes UK budget; oil driven by geopolitics, gold not so much

In other currencies, the pound was struggling to hold onto the $1.31 region amid some caution ahead of Wednesday’s budget announcement in the UK. The euro, meanwhile, remained buoyed by Friday’s decent Eurozone PMI readings, shrugging off a setback by France’s prime minister to get parliamentary approval for his 2026 budget.

In commodities, gold inched higher, benefiting only mildly from increased Fed rate cut expectations. The precious metal has been stuck in a sideways range for much of the past month and that may not change before the Fed’s December policy decision and subsequent data releases, which will provide more clarity.

In the meantime, brewing tensions between Japan and China may be offering some support, although hopes for peace in Ukraine may be offsetting some of that boost.

Ukraine’s Zelensky is under pressure from President Trump to accept America’s 28-point peace plan. The two sides have reportedly made progress on making some modifications to the framework, which may not necessarily please Russia.

So, although an actual agreement is unlikely anytime soon, oil futures have come under significant pressure on the prospect of more Russian supply entering the market. WTI oil futures slid by 3.4% last week and are extending their losses today.