Weekly Market Outlook: U.S. Election and Fed Rate Decision May Trigger Market Volatility

Insights – This week, financial markets brace for two major events: the U.S. presidential election and the Fed's interest rate decision. Volatility is expected to spike, potentially causing significant market movements. On Friday, November 8, the Fed will announce its rate decision, with a 96.1% chance of a 25 basis point cut and a 3.9% chance of no change.

The U.S. election on November 5 is at a critical stage, with Vice President Kamala Harris and former President Donald Trump in a tight race. Markets could see significant swings as they await the results, especially given the candidates' differing trade and protectionism policies. Additionally, on Thursday, the Bank of England will announce its rate decision, with expectations of a 25 basis point cut, though the likelihood is diminishing.

Last Week, the U.S. labor market was weakening, with nonfarm payrolls increasing by just 12,000 in October, the smallest gain since December 2020. GDP grew at an annualized rate of 2.8%, slightly below expectations. The Bank of Japan held rates steady, signaling potential future hikes. Meanwhile, six of the "Magnificent Seven" U.S. tech giants—Apple, Microsoft, Amazon, Google, Meta, and Tesla—reported strong earnings, all beating revenue expectations.

Fed Monetary Policy Meeting

On November 8, the Fed will hold its policy meeting and announce its rate decision. The Fed is widely expected to cut rates by 25 basis points, with a 96.1% probability. Markets also expect a further cut in December, though the election outcome could shift the Fed’s outlook.

A report from the U.S. Department of Labor showed that demand disruptions from hurricanes and strikes caused U.S. nonfarm payrolls in October to plummet to 12,000, far below September's 223,000 and the market's expectation of 100,000. 

U.S. Presidential Election

November 5 marks the U.S. election. According to a final poll conducted by NBC ahead of the election, Harris and Trump are tied at 49% each, with 2% of voters still undecided. Additionally, two-thirds of voters believe the U.S. is heading in the wrong direction. 

As expected, most election-related hedging has occurred at the last minute, as short-term options make pre-event hedging easier. Implied volatility remains much higher than realized volatility. Despite the S&P 500 Index not dropping more than 1% for 29 consecutive trading days, investors are bracing for more significant swings.

Bank of England Rate Decision   

On Thursday, the Bank of England will announce its rate decision. Expectations for a rate cut have eased, with forecasts now predicting three cuts by the end of 2025, totaling no more than 95 basis points. UK job vacancies dropped by 34,000 from July to September to 841,000. Inflation also declined from 2.2% in August to 1.7% in September, below the Bank's 2% target. Goldman Sachs still expects a 25 basis point cut in November but no change in December due to a more expansionary budget. UBS predicts only one rate cut in 2024.

Goldman Sachs still expects the Bank of England to cut rates by 25 basis points in November but now predicts no change in December, revising its previous forecast of another 25 basis point cut due to the UK’s more expansionary budget policy. UBS forecasts only one rate cut by the Bank of England in 2024.

Key Economic Data:

Tuesday: U.S. October ISM Non-Manufacturing PMI, Reserve Bank of Australia rate decision  

Thursday: Bank of England rate decision  

Friday: Federal Reserve rate decision

Earnings to Watch:

U.S. Stocks:Palantir, NXP Semiconductors, Yum China, BioNTech, Emerson, Toyota, Qualcomm, Arm, Airbnb