Market Minute: Weaker U.S. Dollar Lifts the Dow and Russell 2000

The stock market still generally remains in a state of euphoria after the Trump victory with the Dow and Russell 2000 trading near all-time highs on the back of a weaker U.S. dollar. The greenback is on pace for the first weekly loss in eight weeks on speculation that president-elect Trump will eventually temper his most extreme trade policies as the inauguration nears. The dollar is also facing pressure on speculation that the Bank of Japan may raise interest rates at its next policy meeting on December 19th. Bond markets seem unphased by the recent talk of tariffs and the inflationary consequences of implementing them on such a wide scale. The 10-year yield continues to drift lower towards 4.25% where one might expect rates to rise on expectations of higher inflation.  

An increasing risk as the end of the year nears is the Fed starting to walk back some of the dovishness. Recent inflation data point to sticky inflation which is still meaningfully above the Fed's 2% target as core PCE inflation edged higher in year-over-year terms. The Fed’s easing cycle began in September based on weaker labor market circumstances in the summer months. However, interest rate policy sits at a near-neutral setting conditioned upon core inflation that remains above the Fed’s neutral level of 2%. Fed funds futures markets currently project a 66% probability of a rate cut in December, and the Fed could pause policy normalization thereafter.