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Marketmind: Powell's final shot to shape markets before December Fed meeting

[December 01, 2023] A look at the day ahead in U.S. and global markets by Samuel Indyk

As markets continue to push back against the Federal Reserve's higher-for-longer message, traders will be watching Chair Jerome Powell's comments on Friday - the last opportunity the central bank has to set expectations before their December meeting.

The Fed enters its blackout period on Saturday before its Dec. 14 announcement, and Powell, due to speak at Spelman College, has a tough job getting the market to believe him when he says that interest rates will stay high through 2024.

That's because inflation continues to ease.

Data on Thursday showed the PCE price index, the Fed's targeted measure of inflation, eased in October to its lowest level since March 2021, while the consumer price index, released earlier last month, increased just 3.2% on an annual basis in October, down from a peak of 9.1% in June 2022.

Powell's job of shaping markets might have been made even more difficult this week when influential policymaker and usual policy hawk Christopher Waller brought up the possibility of rate cuts if inflation continues on its downward trend.

Markets are now fully pricing a rate cut by the May meeting with almost a 50% chance they move in March, according to the CME's FedWatch tool. A week ago, that stood at a 21% chance.

Money markets are also pricing well over 100 basis points of cuts next year and the dramatic repricing has seen bond yields tumble, particularly in the short end of the curve, with the U.S. benchmark 2-year yield dropping around 27 basis points this week alone.

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A street sign for Wall Street is seen in the financial district in New York, U.S., November 8, 2021. REUTERS/Brendan McDermid/File Photo

The 10-year yield is down around 15 basis points and on Thursday hit its lowest level in 2-1/2 months at 4.247%. It peaked above 5% on Oct. 23.

This has helped push the dollar lower. On Wednesday, the dollar index, which measures the currency against six major peers, touched its lowest level since Aug. 11 and dropped over 3% last month, its worst month in a year.

While November was bad for the dollar, it turned out to be a blowout month for equity markets with MSCI's World Stock Index ending higher by 9% - its biggest one-month jump since a 12% rise in November 2020 when markets cheered vaccines against COVID-19.

December has begun on a similar, if slightly less cheery, note, with Europe's STOXX 600 gaining 0.7% and Wall Street futures trading slightly higher.

Key developments that should provide more direction to U.S. markets later on Friday:

* U.S. S&P Global manufacturing PMI, ISM manufacturing PMI, Canadian labor market data

* Speakers: Fed Chair Powell, Fed's Goolsbee, Fed's Cook, ECB's Lagarde

* Rating Agencies: S&P on France, Fitch on UK, Greece and Ireland, DBRS on Germany and Spain

(Reporting by Samuel Indyk; Editing by Toby Chopra)

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