Trade rhetoric raises tensions

Markets took heated trade rhetoric from President-elect Donald Trump last week more or less in their stride. Trump threatened 25% tariffs on Mexico and Canada over immigration and drug trafficking issues, and warned of 100% tariffs on BRIC nations (Brazil, Russia, India, and China) if they pursue plans for an alternative currency to the U.S. dollar. While Congress may limit some of these actions, Trump’s unilateral trade authority has added uncertainty. Risk assets were under pressure, but the S&P 500 still gained 1.1%, hitting a record high.

Central Banks & Rate Expectations

The U.S. dollar fell 1.7%, while the Japanese yen rallied over 3%. This was despite Bank of Japan (BOJ) signalling a possible rate hike, supported by Tokyo's higher-than-expected inflation rate of 2.6% year-on-year. Markets now anticipate a 15-25 basis point hike at the BOJ's December meeting.

Meanwhile, the Reserve Bank of Australia (RBA) indicated caution on further rate cuts. Deputy Governor Michele Bullock stressed the importance of sustained inflation within the 2-3% target before easing policy. With Australia’s policy rate already less restrictive than other developed nations, markets now expect the next RBA cut no earlier than May 2025.

In Europe, steady inflation keeps the European Central Bank (ECB) on track for a potential 25 basis point rate cut in December. However, French bond yields remained high as political tensions mounted. Prime Minister Michel Barnier faces a critical December 5 deadline to pass a spending plan and avoid a no-confidence vote.

Key Data Points Ahead

The week ahead features several key data releases that could sway central bank deliberations, including U.S. nonfarm payrolls, ISM surveys, and the JOLTS (Job Openings and Labour Turnover Survey) report. Markets expect a 200k rise in November U.S. payrolls and for the unemployment rate to hold steady at 4.1% - well below the Fed's projections. In Australia, Q3 GDP is forecast to show modest 0.5% q/q growth ahead of the RBA's December meeting.

An Uncertain Outlook‍

With geopolitical tensions simmering and central banks sounding a more cautious tone on easing plans, investors head into the final stretch of 2024 grappling with an increasingly uncertain outlook. Much may depend on the path of inflation, the U.S. labour market, and whether Trump's trade threats materialise into actual policy. For now, markets remain in a "wait-and-see" mode.