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The Federal Reserve and several major central banks are anticipated to implement interest rate cuts following the upcoming US presidential election, which may remain unresolved. These decisions will impact over a third of the global economy as central banks seek clarity on future American policies.
The amount of money parked at the Federal Reserve's overnight reverse repurchase agreement facility has fallen to $155 billion, the lowest level since May 2021. This decline raises concerns about the potential for a liquidity crunch as the number of participants also hit its smallest count since June 2021. In stark contrast, a record $2.55 trillion was recorded on December 30, 2022, highlighting a significant shift in investor behavior.
US job creation fell short in October, with only 12,000 new non-farm jobs added, significantly below expectations, partly due to the impacts of hurricanes and aviation strikes. The unemployment rate held steady at 4.1%. As the Federal Reserve prepares for a potential interest rate cut next Thursday, all eyes are on the closely contested presidential race between Donald Trump and Kamala Harris, which could heighten market volatility.
US government debt surged as the economy added only 12,000 jobs last month, influenced by storms and strikes, reinforcing expectations for a Federal Reserve interest rate cut next week. Treasuries, particularly short-term notes, saw yields drop by up to 10 basis points, with traders increasing bets on a quarter-point rate reduction on November 7, shortly after the US elections. Meanwhile, a key dollar index fell to its lowest level in a week.
Bond traders are bracing for volatility as they analyze the upcoming US employment report, which could influence the Federal Reserve's rate-cut strategy. Following a challenging October for US Treasuries, daily yield fluctuations are at a yearly high, with expectations that 10-year yields may rise to 4.5% in the coming weeks.
Gold prices steadied after experiencing their largest one-day drop since July, trading around $2,745 an ounce. The decline followed a surge in Treasury yields and a decrease in expectations for aggressive Federal Reserve interest-rate cuts, driven by strong US economic data. Higher interest rates typically exert downward pressure on gold, which does not yield interest.
The risk of election-related violence poses a significant threat to the US dollar's dominance, which has long relied on the nation's institutional integrity. This stability has kept US borrowing costs low and maintained geopolitical power by excluding rivals from the global financial system. Key officials emphasize that the dollar's strength is rooted in the rule of law and robust institutions.
The yen strengthened against the dollar for the first time in a week after the Bank of Japan raised its growth forecast while maintaining interest rates. Analysts noted that uncertainty from domestic and US politics is likely to delay any rate hikes, contributing to the ongoing disparity in rates between Japan and other countries. Rising US yields and Federal Reserve caution regarding further rate cuts, along with the upcoming US presidential election, have also impacted the yen this month.
Gold prices surged to a record high of $2,790.10 an ounce, driven by increased demand for safe-haven assets amid US election uncertainties. Despite stronger-than-expected jobs data and GDP figures leading to reduced expectations for Federal Reserve rate cuts, the central bank is still anticipated to pursue monetary easing next week, which typically supports gold prices.
The US economy experienced robust growth of 2.8% in the third quarter, surpassing estimates that ranged from 2.0% to 3.5%. This follows a 3% growth rate in the second quarter and exceeds the Federal Reserve's non-inflationary growth benchmark of approximately 1.8%. The advance GDP estimate was released just days before the November 5 elections, where voters will choose between Vice President Kamala Harris and former President Donald Trump.
Federal Reserve Bank of Boston N.A.
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