With the end of the U.S. presidential election last week, diminishing uncertainty boosted equity markets, leading to a strong 4.66% rally in the S&P 500 Index, reaching 5,995.5 points.

In the bond market, the victory of Donald Trump and robust economic data drove the 10-year U.S. Treasury yield to approximately 4.5%, before retreating to around 4.3% following a shift in the Federal Reserve’s stance. Meanwhile, the U.S. dollar index edged closer to the 105 threshold.

Key Economic Data Review for Last Week:

U.S. Presidential Election: Presidential candidate Donald Trump secured seven pivotal swing states, claiming victory with 312 electoral votes over Harris and becoming the 47th President of the United States. The Senate has been confirmed as controlled by the Republican Party, and the House currently shows a Republican lead of 213 seats versus the Democrats’ 203 seats. Should the Republicans maintain their lead, the U.S. will enter a period of unified Republican governance under Trump’s administration.

China’s National People’s Congress Standing Committee: The committee announced an increase in local government special bond issuance limits by RMB 6 trillion (approximately USD 837 billion) to restructure hidden local debts. Additionally, over the next five years, beginning in 2024, RMB 800 billion per year from new local special bond allocations will be earmarked for debt reduction, with an anticipated total restructuring of RMB 4 trillion in hidden debt.

U.S. Monetary Policy Decision: The Fed cut rates by 25 basis points at its November meeting, shifting its policy stance from the markedly dovish position of September to a more neutral outlook. This change reflects stronger-than-expected resilience in recent U.S. economic data. Following the meeting, market expectations for rate cuts next year were adjusted, with the Fed now anticipated to cut rates 25 basis points in December 2024, and 75 basis points in the first half of 2025, before pausing further reductions (previously expected to cut four times in 2025).

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Key Economic Data for This Week:

U.S. CPI (11/13): The impact of October’s hurricanes may have pushed many to seek temporary accommodation, driving up service prices. Additionally, hurricane damage to automobiles may lead to further increases in auto parts prices. According to forecasts from the Cleveland Fed, October’s CPI annual growth rate is expected to rise to 2.56% (from 2.41% in September), with core CPI projected to inch up to 3.34% (from 3.26%).

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U.S. Retail Sales (11/15): Entering the traditional holiday shopping season, the National Retail Federation anticipates that strong household financial health will continue to support consumer spending. Market expectations for retail sales growth remain robust, with a monthly increase projected at 0.3% (previously 0.4%) and an annual growth rate of 2.2% (previously 1.74%).

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China’s Monthly Economic Data (11/15): Against the backdrop of government initiatives such as old-for-new consumer goods campaigns and Singles’ Day promotions, the market anticipates that October’s retail sales growth will increase to 3.8% year-on-year (from 3.2%). With Trump’s election as President and the possibility of significant tariffs on Chinese imports, Chinese firms may accelerate production and exports, with industrial output growth expected to rise to 5.5% (from 5.4%). Meanwhile, fixed asset investment remains constrained by weaknesses in the real estate sector and local government finances, with projected cumulative annual growth holding steady at 3.5% (from 3.4%).

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The U.S. Federal Reserve announced a 25 bps rate cut to 4.5%-4.75% at its monetary policy meeting on November 7, aligning with market expectations.

In its statement, the Fed removed the phrase “job gain have slow” and replaced it with “Since earlier in the year, labor market conditions have generally eased.” Additionally, the Fed dropped the language stating it had “greater confidence that inflation is moving sustainably toward 2 percent,” and reaffirmed the committee’s view that risks related to both inflation and employment are now roughly balanced.

Regarding future monetary policy adjustments, the Fed eliminated the reference to “the progress on inflation and the balance of risks” and reiterated that it will continue to base rate adjustments on current economic data, outlook, and the balance of risks. The Fed also emphasized that it will persist in reducing its holdings of Treasury securities, agency debt, and MBS to achieve maximum employment and a return to 2% inflation.

Overall, the Fed’s stance has shifted from the highly dovish position in September to a more neutral one. Unlike the previous meeting, where one member dissented on a 50 bps rate cut, this time all members supported a 25 bps cut, reflecting the resilience of the U.S. economy and a diminished perception of downside economic risks.

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According to FedWatch data, the market now anticipates that the Fed will cut rates by 25 bps each in January, March, and June of 2025, bringing the rate down to 3.75%-4%, compared to the previous expectation of four 25 bps cuts in 2025.

(Source: FedWatch)

Post-Meeting Press Conference Q&A Highlights

Q1: One year ago, the 10-year Treasury yield was at 5%, while the 30-year mortgage rate stood at 8%. At the time, the Federal Reserve expressed concerns that further rate increases could pressure the economy. Now, despite the Fed easing restrictive policies, the 10-year Treasury yield continues to climb. How does this differ from the risks seen a year ago?
A1: The Federal Reserve acknowledges the rise in Treasury yields. However, these increases may more accurately reflect stronger-than-expected U.S. economic growth or a reduction in downside risks related to a potential recession.

Q2: Given the current economic environment, is the September SEP (Summary of Economic Projections) rate path still relevant?
A2: Overall, economic performance has indeed surpassed expectations. The upward revisions in NIPA (National Income and Product Accounts), strong September employment, and robust October retail data all support this view. As a result, downside economic risks have diminished, and we will continue to incorporate such factors into our assessments. Additionally, we have upcoming reports in December, including one more employment report, two inflation reports, and other economic data, which we will use to inform further policy decisions.

Q3: The latest PCE (Personal Consumption Expenditures) growth is 2.1%, which is very close to the Fed’s target, yet core PCE remains at 2.7% and has been steady at this level since July. Why did these figures not prompt the Fed to pause rate cuts at this meeting?
A3: The 3-month and 6-month annualized core PCE growth stands at 2.3%, indicating notable progress on inflation. However, we expect some volatility. For example, the core PCE annual growth rate was exceptionally low in the last three months of last year but saw a seasonal uptick in January 2024. We anticipate further declines by February next year. Currently, core PCE excluding housing services and goods (approximately 80% of core PCE) has already fallen to 2%—comparable to levels in 2000—and housing services inflation should ease as new lease agreements are signed. Moreover, labor market conditions are no longer contributing to inflationary pressures. While we are not declaring a full victory over inflation, we are confident that inflation can steadily decline to 2% within this scenario without being disrupted by one or two months of short-term data fluctuations.

Q4: Is the Federal Reserve actively working toward achieving a neutral rate, or does the Fed have a timeline for reaching this neutral rate target?
A4: Given the current economic landscape, the Federal Reserve is not rushing to reach a neutral rate. As long as the economy remains strong, we believe we can identify a reasonable rate path that balances the risks of easing policy too quickly or too slowly.

Comparison of the September and July FOMC Statements

• Agenda47 | Donald J. Trump
• Upside risks have increased in toss-up US election

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(Photo Credit: Donald J. Trump Facebook)

The U.S. services PMI expanded for the fourth consecutive month in October, rising from 54.9 in September to 56.0—its highest level since July 2022, according to data released by the Institute for Supply Management (ISM) on November 5.

Business Activity & New orders

In the subindices, the business activity index slightly declined from 59.9 to 57.2, and the new orders index fell from 59.9 to 57.4. However, both indices stayed in expansion territory for the fourth month, reflecting strong demand in the U.S. services sector.

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Employment & Supplier Delivery

The employment and supplier delivery indices also improved, with the employment index climbing from 48.1 to 53.0, reaching its highest level since August 2023. This improvement suggests that previous employment data may have been influenced by short-term factors like hurricanes and strikes. Meanwhile, the supplier delivery index increased from 49.6 to 52.1, likely indicating delayed delivery times due to disruptions from recent storms and port strikes.

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Other indices showed continued expansion, with the prices index marking its 89th consecutive month in growth, while export and import indices slightly softened but remained above 50.

Overall, October’s services PMI offers a solid start for U.S. economic data in the fourth quarter. According to the ISM report, the October services PMI correlates with an annualized real GDP growth rate of 2.3%.

This contrasts sharply with the manufacturing PMI, which was recorded at 46.5 in October, down 0.7 points from the prior month, marking seven consecutive months in contraction. The gap between the services and manufacturing PMIs widened to 9.5 points, underscoring the growing divergence between the two sectors.

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ISM Industry Comments

“Material availability and delivery continues to improve. The port strike had an impact, as we had to divert shipments, but the overall costs are not material. Services cost remains elevated but easier to negotiate.” – Accommodation & Food Services

“Monitoring inventories much closer than in the past. We’re refilling inventories for the fall and winter seasons are lower level than normal, but those decisions are easy to understand.” – Agriculture, Forestry, Fishing & Hunting

“Business is good. Building backlog. Commercial Construction is strong. Commercial Service is busy. All other areas are level.” – Construction

“Hurricane Helene seriously damaged an IV production plant in North Carolina, which was 60 percent of all national supply of IV bag fluid/solution. We are now starting to experience shortages. In addition, two hurricanes hit Florida, which impacted many of our lab vendors. Plus, the port workers’ strike impacts shipments of materials that our (U.S.) labs use to manufacture medicine and medical supplies. We anticipate a rise in prices and longer wait times, and most likely, shortages of some supplies.” – Health Care & Social Assistance

“Sadly, the recent hurricanes/tornadoes, and any future climate-related catastrophes, are good for the equipment sales and rental businesses. That and the continued infrastructure spending.” – Information

“Revenue cycles are lengthening. Good sales, but longer service periods. Commodity pricing is stabilizing as inflation concerns ease. Business is in a steady state, with everyone holding an even keel awaiting U.S. election results.” – Professional, Scientific & Technical Services

“Hurricane impacts have affected supplier deliveries.” – Real Estate, Rental & Leasing

“Port strikes did not impact our supply chain, but we confirmed all our strategic vendors had plans in place should they have an impact.” – Retail Trade

“Business is booming, nothing slowing down. Prices continue to increase slightly.” – Utilities

“The economy is still causing issues within our business and that of our suppliers.” – Wholesale Trade

• October 2024 Services ISM® Report On Business®

Following the Federal Reserve’s two-rate cut and release of its latest Summary of Economic Projections (SEP) on September 18, the U.S. 10-year Treasury yield has surged by 60 basis points over the past two months, from around 3.7% to approximately 4.3%. Why have Treasury yields risen so sharply? We attribute this trend to several key factors:

Market Overestimation of Rate Cuts
Earlier, the market was more optimistic about rate cuts, generally expecting that a potential recession in the U.S. would prompt the Fed to lower rates by over 11 cuts in this cycle. As a result, the 10-year Treasury yield declined to around 3.65% between July and September. However, the SEP released on September 18 indicated that rate cuts may only total approximately 10 basis points in this cycle, with the Fed expressing confidence in managing inflation and stabilizing the labor market. This shift led the market to recalibrate expectations, pushing the 10-year Treasury yield up by 20 basis points to around 3.85%—a key initial factor behind the rise in yields.

(Source:  Fed)

Stronger-than-Expected Economic Data
At the Fed’s meetings in July and September, the emphasis shifted from inflation to the labor market, with the market trading Treasuries based on the notion that “a deteriorating labor market could trigger a recession in the U.S.”

However, unexpectedly, the employment data released on October 4 significantly exceeded market expectations. Non-farm payrolls for September saw a substantial increase, and the unemployment rate declined once again. Although October’s non-farm payroll data showed a sharp drop, this was primarily due to temporary impacts from hurricanes and strikes. The ADP data indicates that the job market remains robust, which has led the market to raise its interest rate expectations again. As of November 1, the U.S. 10-year Treasury yield has risen to approximately 4.38%.

(Source:  CME, FedWatch, TrendForce)

Additionally, recent data on retail sales and GDP have highlighted robust consumer spending, with consumer confidence also climbing steadily. These indicators underscore the resilience of the U.S. economy, contributing to the recent rise in Treasury yields.

Potential Debt Expansion in Coming Years
While the U.S. Treasury on October 30 announced no changes to its long-term bond issuance size and the Treasury Secretary signaled that issuance would remain steady for upcoming quarters, potential increases in U.S. debt may be inevitable. The lack of a strong focus on deficit reduction among presidential candidates in the ongoing election cycle suggests debt growth may persist, which is another significant factor driving up recent Treasury yields.
Overall, if economic data continue to show strength, the Fed’s ability to cut rates may remain constrained. Meanwhile, though the Treasury plans to maintain issuance levels in the short term, the absence of a deficit reduction focus among candidates signals ongoing risks of fiscal expansion. These factors are likely to exert further upward pressure on U.S. Treasury yields.

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