The dollar index (DXY00) Friday fell slightly by -0.04%. Meanwhile, EUR/USD (^EURUSD) rose by +0.04%, and USD/JPY (^USDJPY) fell by -0.55%.
The dollar fell Friday due to the small -0.8 bp decline in the 10-year T-note yield, which undercut the dollar’s interest rate differentials. The dollar also saw some pre-weekend long liquidation pressure after the rally seen Tuesday through Thursday to a 3-week high. The dollar was also undercut by this week’s drop in expectations for another Fed rate hike.
The dollar saw underlying support from safe-haven demand, with Friday’s -0.68% drop in the S&P 500 index and Middle East tensions. The U.S. Thursday night carried out aircraft strikes on two Iranian-backed facilities in Syria. The U.S. strikes were in response to attacks against U.S. personnel in Iraq and Syria since October 17.
Also, an Israeli defense spokesman said Friday that Israeli forces are "expanding ground activity this evening." Israel on Wednesday and Thursday nights launched ground raids into Gaza before withdrawing. The markets are waiting for Israel’s all-out ground invasion, which could spark an expansion of the war to include Hezbollah in Lebanon and possibly other Iranian-backed groups.
Friday’s U.S. PCE deflator report, which is the Fed’s preferred inflation measure, was mostly in line with market expectations and had little impact on expectations for Fed policy. The Sep PCE deflator report of +0.4% m/m was slightly higher than expectations of +0.3%, but the year-on-year figure of +3.4% was in line with market expectations. The Sep core PCE deflator report of +0.3% m/m and +3.7% y/y was in line with market expectations.
Friday’s U.S. Sep personal income report of +0.3% m/m was slightly weaker than expectations of +0.4%, but the Sep personal spending report of +0.7% m/m was stronger than expectations of +0.5%.
Friday’s final-Oct U.S. consumer sentiment index from the University of Michigan was revised higher by +0.8 points to 63.8, which was stronger than expectations for an unchanged level but was still a 5-month low. The index was down by -4.1 points from September, marking the third consecutive monthly decline in consumer sentiment.
The markets are discounting a zero percent chance that the FOMC will raise the funds rate by +25 bp at next week’s FOMC meeting (Oct 31-Nov 1), an 18% chance for that +25 bp rate hike at the following meeting on Dec 12-13, and a 10% chance for that +25 bp rate hike at the FOMC meeting after that on Jan 30-31, 2024. The markets are then expecting the FOMC to begin cutting rates later in 2024 in response to an anticipated slowdown in the U.S. economy.
December gold (GCZ3) Friday closed up +1.10 (+0.06%), and Dec silver (SIZ23) closed -0.021 (-0.09%). Gold prices were boosted by Middle East tensions, a small -0.8 bp decline in the 10-year T-note yield, and the slightly lower dollar. Silver was undercut by general concern about the global economy as the Israel-Hamas conflict appears to be escalating to an all-out Israeli ground invasion.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
