Financial News Highlights

  • U.S. Treasury yields continued to rise as the race for the White House tightened, leading to elevated uncertainty regarding the future path of fiscal policy in financial news.
  • Federal Reserve speakers this week noted that further reductions in interest rates would be warranted, although incoming data supported a cautious approach.
  • Existing home sales fell to a fourteen year low in September. Elevated interest rates, combined with expectations for lower rates moving forward, worked to keep demand subdued.

Countdown to Election Day

Financial News Chart 1: The chart shows daily year-to-date data for the U.S. 2-year and 10-year Treasury yields, as well as for the U.S. Dollar spot index. All three financial variables rose in tandem through the first half of the year, with the 2- and 10-year Treasury yields hitting a peak of roughly 4½-5% around mid-year, before falling in tandem through to the end of September. Since the start of October, both Treasury yield and the U.S. dollar have risen, with all three now at a three-month high.One of the most anticipated global events of 2024 is now nearly a week away. As financial markets anxiously await the outcome of the U.S. presidential and congressional elections, we have seen U.S. Treasury yields and the U.S. dollar rise to three-month highs (Chart 1). The uptick which began earlier this month was initially incited by stronger-than-expected economic data, but recent movements have also likely been driven by the narrowing in the polls for the U.S. presidential election. Given that the election will determine the path of fiscal policy moving forward, and by extension monetary policy, uncertainty related to the outcome is likely to remain a weight on financial markets through to November 5th.

Elevated interest rates continued to dampen housing market activity in September, as existing home sales fell to their lowest level since 2010! Demand is also likely being restrained in part by consumer expectations for lower interest rates moving forward, with Federal Reserve Chair Powell indicating that rates would likely be trending lower through the coming year during his press conference last month. Existing home sales are likely to remain subdued in the near-term as mortgage rates moved back above 6½% in October. Nevertheless, the housing market is expected to thaw over the coming year as the Federal Reserve continues to reduce borrowing costs.

Financial News Chart 2: The chart shows the implied financial market expectation for the Federal Reserve's policy rate at the end of 2024 and 2025 as of September 24th, 2024 and October 24th, 2024. The chart also shows the Federal Reserve's median projection for their policy rate from the September Summary of Economic Projections. Financial markets were initially expecting 50 basis-points of additional rate cuts this year than the Federal Reserve was, but more recently they have realigned with the Federal Reserve's view of two more 25 basis-point cuts by year-end. By the end of next year, financial markets and the Federal Reserve now expect rates to be roughly 150 basis points lower than their current level.The Federal Reserve will be entering its pre-interest rate decision blackout period this weekend, with no further updates expected until Chair Powell’s post-meeting press conference on November 7th. The Fed officials we heard from this week stated that the strength of incoming economic data would warrant caution in future policy decisions, but all speakers noted that the trajectory of interest rates would continue to be downward. Market pricing has pulled back their expectations for rate cuts, but they are now realigned with the Federal Reserve’s median projection from the September Summary of Economic Projections (Chart 2).

Next week sees a bumper crop of data releases that will be key inputs to the Federal Reserve’s next interest rate decision. The advance estimate for real GDP growth in the third quarter is expected to show the economy continuing to grow at a strong pace of 3.0%. While employment growth remained solid in the third quarter, October’s employment report due out next Friday is expected to show a deceleration in job gains (125k vs. 254k in September). The Federal Reserve will also be monitoring the release of their preferred inflation metric next week, core PCE, which is expected to show a modest decline to 2.6% in September.

Assuming there are no surprises in the incoming data, the Federal Reserve is expected to continue to cut rates at a pace of 25 basis points per meeting through the end of the year. Chair Powell’s remarks on November 7th will be monitored closely for guidance, although they may be competing with the results of the 2024 election for the attention of financial markets. Suffice it to say, markets will not be left wanting for important developments in the coming weeks.

Andrew Foran, Economist | 416-350-8927

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