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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Market Analysis]: Fed Daley warns not to delay interest rate cuts, dove voices boost expectations! The U.S. dollar is weak at 100, and global easing has reached its peak." Hope this helps you! The original content is as follows:
Boosted by the market's increased expectations for the Federal Reserve to cut interest rates next month, international spot gold rose sharply, once rising nearly 100 US dollars from the daily low. As of now, the US dollar is quoted at 100.24.
Russia-Ukraine situation - ① U.S. President Trump: (talking about Ukraine talks) Something good may happen, and Ukraine negotiations may be making progress. ②German Chancellor Mertz: There will be no breakthrough in Ukraine negotiations this week. ③Ukrainian officials: The previous 28-point peace plan no longer exists. The United States and Ukraine have drafted a new 19-point peace plan, but the most politically sensitive parts will be left to the presidents of the two countries to decide. ④ Zelensky: The list of steps to end the conflict is becoming feasible and he will discuss sensitive issues with Trump.
The September PCE of the United States will be released on December 5. The release of the second estimate of GDP in the third quarter has still to be rescheduled, and the release of the initial value has been cancelled.
It is reported that the EU has rejected the United States’ request to relax technical rules to reduce steel tariffs.
The Bank of Israel cut interest rates by 25 basis points, lowering the benchmark interest rate to 4.25%, the first interest rate cut since January 2024.
Federal Reserve-① Governor Waller: Since the last meeting of the Federal Reserve, the available data show that there has been little change and inflation is not a big problem. My concern is the labor market, and I advocate a rate cut in December. ②American LeagueChu Daly: The job market may suddenly deteriorate, supporting an interest rate cut in December. Although Daly does not have a vote on monetary policy this year, she rarely disagrees with Fed Chairman Jerome Powell in public. ③ There is a view in the market that the Federal Reserve should wait for the non-farm payrolls release and postpone the December interest rate meeting. ④The probability of the Federal Reserve cutting interest rates in December has risen to 80%.
Morgan Stanley: U.S. macro policy risks have "passed the peak", and the market focus will turn to corporate management in 2026
U.S. policy choices in 2025 will largely dominate the economic and market trends, but there is a high probability that 2026 will not simply repeat this year's script. Most of the four key policy variables currently affecting the market - tariffs, immigration, fiscal policy and deregulation - have been fully priced by the market or face the constraints of diminishing marginal effectiveness. Although the tariff issue remains important and policy risks will remain in 2026, we believe that trade policy uncertainty has passed its peak. In the future, market dominance will shift from macro policy makers to corporate management.
We expect it will be difficult to introduce more fiscal stimulus measures next year. With the implementation of the Big and Beautiful Act, subject to the legislative process and lack of consensus within the party, there is very limited room for further fiscal stimulus before 2027 (unless a recession leads to a passive fiscal response, but our economists believe this is a low-probability event). In addition, after the mid-term elections, the promotion of proactive fiscal policies relies heavily on the unified government control of Congress; once the government is divided, policy deadlock will almost be an inevitable result.
As for the midterm elections themselves, we do not believe they will be a key catalyst for market direction. Most of the major policy advancements in 2025 will rely on executive power, and we expect this pattern to continue, especially if the Democratic Party retakes at least one house of Congress. Even if the Democratic Party performs better than expected and may push for some "symbolic legislation" (such as disapproving resolutions, trying to return tariff-setting power to Congress, etc.), the possibility of these bills finally being implemented is extremely low under the constraints of the presidential veto.
Morgan Stanley: The Federal Reserve faces a dilemma, and the four major scenarios look forward to the future economic and interest rate path
The current dilemma facing the Federal Reserve is whether to listen to the signal of the slowing labor market or the signal of still solid consumer spending? Our baseline forecast adopts a www.xmxmxm.cnpromise path - with the unemployment rate rising modestly, the Federal Reserve will gradually cut interest rates to neutral levels; at the same time, with policy support, the economy is expected to achieve a solid recovery in the second half of 2025.
In addition to the baseline scenario, three alternative US-driven scenarios would drastically change this outlook:
Scenario One: Demand-driven Upside
This is characterized by strong spending coupled with rising inflation. This scenario would cause the job market to catch up with aggregate demand and inflation never subsides. This will force the Fed to shift from easing policy to raising interest rates again.
Scenario 2: Productivity-driven upside
One of the characteristics is that the rapid application of AI promotes an explosion of productivity and brings about a de-inflation effect. This scenario is accompanied by rising productivity and simultaneously suppressing prices, allowing the Federal Reserve to eventually cut interest rates even if the economy is growing steadily.
Scenario Three: Mild Recession
This scenario is triggered by triple pressures: tariff shocks, tightening immigration policies, and the lagged effects of restrictive monetary policies. While past tightening policies will further dampen growth and tariff barriers will weigh on output, we judge that any recession will be mild and that the Fed will not need to cut interest rates to zero to effectively deal with it.
With Japan’s 17.7 trillion yen fiscal stimulus implemented, can inflation become a “fig leaf” for soaring debt?
The Japanese cabinet has officially approved the economic package of the ruling coalition, with a supplementary budget of up to 17.7 trillion yen (about 2.8% of GDP). The scale of this expenditure is significantly higher than last year’s 13.9 trillion yen. Including private sector projects, the total size of the economic plan reaches 42.8 trillion yen.
The plan consists of four pillars, of which measures to deal with high prices account for the largest share, and the supplementary budget will bear 8.9 trillion yen for this purpose. Includes crisis management and growth investments, enhanced defense capabilities and reserves. It is worth noting that approximately 1 trillion Goldman Sachs:yen is earmarked for increased defense spending.
Since the supplementary budget contains a large number of items whose actual expenditure will be postponed to fiscal year 2026 or later, we expect that this will not only expand the fiscal deficit in 2025, but also push up the deficit level in 2026. Although some non-governmental consumption and investment measures may not directly worsen the fiscal balance, during 2025-26, www.xmxmxm.cnpared with the scenario without supplementary budget, we believe that the fiscal deficit will expand by more than 1 percentage point in GDP. Even with the implementation of a large-scale supplementary budget, we expect the public debt-to-GDP ratio to be lower at the end of fiscal 2025 than in the previous year. Japan is currently in an "inflation dividend period." In the context of inflation, nominal GDP (denominator) continues to expand, while the increase in interest payments is relatively limited. This "natural decline" effect is very significant. Therefore, temporary increases in government spending, such as the supplementary budget, are unlikely in themselves to destabilize public debt sustainability. However, if the ruling coalition continues with this fiscal expansion policy (or converts these temporary spending into permanent spending), market concerns about debt sustainability may quickly increase. We expect the increase in spending in the supplementary budget to be financed mainly through the issuance of additional government bonds.
Australia and New Zealand Bank: The December resolution has fallen into an unprecedented stalemate, what might be the final decision?
Previous meeting minutes show that officials’ views on the decision of the next meeting are mainly divided into three camps: the suspension camp, the interest rate cut camp and the uncertainty camp. There are many people who support the moratorium, but they do not constitute a majority, and most of them www.xmxmxm.cne from regional Fed chairmen and are not major members participating in the vote. Members of the interest rate cut faction have voting rights, while members of the uncertainty factionPrefer to get more data before the meeting. For the uncertain faction, September's non-farm payrolls are crucial, but the data has lagged behind in December. We believe the impact is limited, and due to the absence of CPI, the uncertain faction can only obtain www.xmxmxm.cnrmation through private sector data.
Waller's support for the December interest rate cut is particularly clear. He believes that the outside world's concerns about the lack of data are exaggerated. Policymakers are not unable to start because of the lack of some government data. Private data and some public data are still sufficient to provide an actionable economic portrait. He specifically pointed out that the labor market is still weak, growth is almost stagnant, the impact of tariffs is limited, and medium- and long-term inflation is stable. Fed Williams' speech further strengthened this tendency.
We believe that the overall environment has not fundamentally changed since the Federal Reserve released its economic forecasts in September. The dot plot shows that the median expectation for the remainder of 2025 still points to a cumulative rate cut of 50 basis points, which means that another 25 basis points is expected to be cut in December. With consumer sentiment near historical lows and the unprecedented government shutdown jointly dragging down demand, we judged actual demand to be weaker than officials imagined at the time. Therefore, we still tend to believe that interest rates will be cut by 25 basis points in December, but this decision is likely to be extremely stalemate, and many members will hold different opinions.
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