AI May Start to Boost US GDP in 2027

Economic

Summary:

Generative artificial intelligence has the potential to automate many work tasks and eventually boost global economic growth: Goldman Sachs Research forecasts AI will start having a measurable impact on US GDP in 2027 and begin affecting growth in other economies around the world in the years that follow.

The foundation of the forecast is the finding that AI could ultimately automate around 25% of labor tasks in advanced economies and 10-20% of work in emerging economies, Goldman Sachs economists Joseph Briggs and Devesh Kodnani write in the team’s report.

They estimate a growth boost to GDP from AI of 0.4 percentage points in the US, 0.3 percentage points on average in other DMs, and 0.2 percentage points on average in advanced EMs by 2034. In other emerging markets, Goldman Sachs Research forecasts a smaller boost from AI given adoption will probably take longer and AI exposure will likely be lower.

“We expect this automation to drive labor cost savings and free up workers’ time, some of which will likely be allocated to new tasks,” Briggs and Kodnani write. The ultimate size of those effects will depend on how capable AI actually becomes and how it’s implemented.

How much can AI improve productivity?

In the baseline scenario, the Goldman Sachs Research economists estimate AI could increase US productivity growth by 1.5 percentage points annually assuming widespread adoption over a 10-year period. They expect similar effects in other major developed markets, and a somewhat smaller impact of 0.7-1.3 percentage points in most emerging economies given their higher share of employment in sectors with low AI exposure like agriculture and construction.

Taken at face value, those kinds of productivity gains would suggest a substantial jump in GDP growth around the globe. Assuming workers aren’t permanently replaced by automation and there’s capital to support the increase in productivity, the increase in productivity could boost long-run worldwide GDP by as much as 15%. But Briggs and Kodnani think the net effect will be somewhat lower than that for two key reasons.

First, our economists already include technological innovation in their economic forecasts. Simply adding their estimates for the boost in productivity from AI to the current trend would likely result in some double counting. They note that information and communication technology (ICT) investment has already been the main driver of productivity growth in major economies over the last 20-30 years.

And second, the underlying productivity growth has been slowing. Academic research suggests that growth in total factor productivity (calculated by dividing real output by the combination of labor and capital inputs) tends to slow over time as countries develop, except during rare “regime shifts” such as those triggered by the first and second industrial revolutions.

Predictions of AI superintelligence seem premature

Is generative AI different? Some observers have argued that it could be a paradigm-shifting technology that ushers in a new regime for productivity growth. Equity analysts in Goldman Sachs Research have identified sectors where they think this could happen, including in healthcare and drug discovery, cybersecurity, design, and software development. Some have gone a step further and view recent advancements in AI as a meaningful step towards a “superintelligence” that is able to process information, formulate views, and innovate beyond the capability of humans.

For now, the more extreme predictions appear “very premature, especially given the well-documented limitations of current AI models,” Briggs and Kodnani write. “We therefore maintain our view that for the foreseeable future, generative AI will mostly drive efficiency gains by automating less difficult but time-consuming tasks, thereby empowering workers to engage in more productive activities.”

In the meantime, much will depend on the adoption timeline. Historically, productivity booms driven by prior milestone technologies — such as the electric motor and personal computer — have lagged the initial innovation by more than a decade. These innovations only began to show up in macroeconomic data once roughly half of affected businesses had adopted the technology.

“We have been relatively cautious on the AI adoption timeline,” Briggs and Kodnani say. “While a rapid acceleration in AI-related investment is ongoing for leading technology and professional services firms which are developing and pioneering the use of AI, the effects on productivity that we have estimated will require the implementation of AI across a broader set of industries and job functions.”

AI’s effects on GDP will take time to emerge

Surveys of businesses and executives indicate that they generally anticipate a small impact from AI on activity and hiring needs in the next 1-3 years but a much larger impact in the next 3-10 years. Likewise, Goldman Sachs Research expects broad-based adoption to accelerate in the US beginning in the second half of this decade. The adoption timeline may be even more drawn out elsewhere, as the US and other advanced economies have historically led in the adoption of milestone technologies.

Taken together, our economists’ model indicates AI will probably have a positive impact on GDP over the next decade — but it will take a few years to show up in the numbers. Goldman Sachs Research is leaving its forecasts unchanged until at least 2027 for the US and 2028 for other economies. How the timeline for adoption plays out, the amount of ICT investment that’s displaced by AI spending, the extent of AI’s emerging capabilities, as well as potential regulatory barriers, will all influence how and to what extent these economic gains are realized.

“Our estimates reflect a balanced consideration of these risks, and provide a template for analyzing the longer-run effects of AI on the macroeconomy,” Briggs and Kodnani write. “In our view, the development of capable AI is likely to be among the most consequential macroeconomic stories of the 21st century, with important implications for relative economic performance, financial market returns, and longer-run interest rates.”

Source:Goldman Sachs

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Cohen

Stocks

Economic

Every investor wishes they had a crystal ball. Anyone who did would have piled into Amazon at the start of the millennium, bet the house on Apple shares, and shorted banking stocks moments before the financial crisis struck in 2007.

They'd have bought shares in Zoom, Peloton and Netflix before the pandemic and sold them as the lockdown ended, and made an overnight fortune playing GameStop, AMC Entertainment and all those other mind-bending meme stocks.

Investing would be all upside, and no downside, if only we knew what was coming round the corner.

Sadly, we don't. There's no crystal ball. Second-guessing market movements is next to impossible, nobody knows what's coming next. We remain at the mercy of events.

That doesn't stop people from trying, though. You can always find one analyst or another calling the next bull run or stock market crash, even if they get it wrong 99 times out of 100.

The big irony of investment predictions is that short-term movements are impossible to second-guess, while longer term trends are a bit more predictable.

Few will have predicted the wild swings we have seen this millennium, as the dot-com crash, 9/11 terror attacks, global financial crisis, pandemic and energy shock left investors reeling. Or foreseen the sheer scale of the decade-long US tech stock rally.

Yet, those who assumed that in the longer run shares would still beat every other asset class, as they have done for more than a century, will largely have been proven right.

Similarly, we can assume that bonds will deliver a lower return but with less risk, and splitting the two asset classes in a 60/40 equity-bond portfolio gives investors the best of both worlds – with the notable exception of 2022, when both crashed at the same time.

This knowledge emboldens the likes of JP Morgan Asset Management to publish its annual Long-Term Capital Market Assumptions, which provides a 10 to 15-year outlook for risks and returns across major asset classes.

Its 28th edition, just published, aims to provide "actionable insights as investors look to build smarter portfolios in the midst of a transition from disinflation to reflation, and from policy accommodation to higher costs of capital".

It aims to provide, if not a crystal ball, then at the very least a "road map" to steer through unpredictable markets.

So, what's the direction in 2024 and beyond?

The good news is that the forecast annual return for a US dollar-dominated 60/40 stock-bond portfolio over the next 10 to 15 years is an attractive 7 per cent per year.

Investors who add a 25 per cent allocation to alternative assets have "clear opportunities" to boost this to around 7.6 per cent, it says.

Investors will be delighted to hear that the "long-term growth outlook has risen slightly", as automation and artificial intelligence boost productivity, while the energy transition and new technologies deliver thrilling new investment opportunities.

While these trends will drive developed market growth, the report's emerging market forecasts have "dipped slightly due to lower trend growth in China".

JP Morgan head of global multi-asset strategy John Bilton says the world is entering a period of significant economic transition in the wake of the global pandemic and heightened geopolitical tensions, and this will have far-reaching implications for investors.

"We are now moving away from an environment with persistent disinflation, ultra-easy monetary policy and fiscal restraint," Mr. Bilton says.

This transition requires investors to build "robust portfolios", which should include reducing cash exposure to harvest better returns and broaden international exposure to enhance returns and diversification, he adds.

JP Morgan's LTCMA lands just as investors get their appetite for risk back after the US Federal Reserve, European Central Bank and Bank of England all froze interest rates again, suggesting the rate hike cycle may now have peaked.

While central banks warn that rates could still climb higher – and the Fed may even mean it – investors have rediscovered their appetite for risk as they anticipate the end of rate hikes, says Kyle Rodda, senior market analyst at Capital.com.

"Risk appetite remains strong after this week's positive developments on the monetary front, despite mixed corporate results and lingering geopolitical worries in the Middle East," he adds.

Lindsay James, investment strategist at Quilter Investors, says peak interest rates should be good news for investors and next year's anticipated rate cuts would be even better, "as they can often bring about very strong returns".

"While markets may not be shooting the lights out, remaining invested over this period is going to be crucial," she adds.

Chris Beauchamp, chief market analyst at online trading platform IG, says last week's stock market rally arrived "almost on cue in seasonality terms", as the final weeks of the year tend to be best for shares.

However, he also warns that hopes of peak rates have been dashed before and investors "need to resist the temptation to charge back into stocks too quickly".

Yves Bonzon, group chief investment officer at Swiss bank Julius Baer, reckons concerns that the Israel-Gaza conflict will spiral out of control and send oil prices soaring have been overdone. Instead, he is looking forward to a year-end rally.

He says the US stock market has been the big winner of the past decade and is likely to dominate global capital markets in 2024 and beyond.

"Regardless of relative valuations, there is a reason why US assets continue to outperform non-US assets for an extended period of time. In light of the new geopolitical reality, there is simply no sizeable alternative to US dollar capital markets for Western investors," adds Mr. Bonzon.

He also suggests we are on the cusp of an "innovation super cycle", which would allow for significant value creation among market leaders.

"Historically, the Nasdaq has been at the forefront of creating such value during these super cycles. We would selectively consider disruptive innovators in other domiciles, too," says Mr. Bonzon.

The US may be mired in debt and facing a potential recession. But, as history shows, no market can touch it and that is likely to remain the case for the next 10 to 15 years, too.

Shares have had a bumpy ride, but is there really any serious alternative?

Just remember to diversify. Now may be a good time to also buy a few government bonds as yields peak.

Build a balanced portfolio and hold for the long term. No crystal ball required.

Source: The National News

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Damon

Economic

Forex

The dollar's recent weakness will linger for the rest of the year, according to a majority of FX strategists in a Reuters poll, who also said economic data will be the primary influencer of major currencies for the rest of 2023.

Renewed expectations the Fed is done with its rate hikes have put the dollar at a disadvantage, with the currency losing almost 2.0% from last month's peak, leaving the dollar index up around 2% for the year.

Suggesting the current dollar weakening trend has further to go, a near two-thirds majority of analysts, 28 of 45, who answered a separate question said the dollar is likely to trade lower than current levels against major currencies by year-end.

They also expect it to slip against the euro and other G10 currencies over the next 12 months, a position analysts have held all year but have been proven wrong each time. Some are sounding more confident this time they will be right.

"The dollar and U.S. yields have had a strong bullish trend over the (past) two to three months ... but it looks like we've reached a point where yields and the dollar have peaked out," said Lee Hardman, senior currency analyst at MUFG.

"It's going to be harder for yields to hit fresh highs this year because markets are now more confident that the Fed is done hiking, speculation has already started to intensify again that next year we could see a policy reversal from the Fed with speculation building over more aggressive Fed rate cuts next year."

When asked what will be the primary influencer of major currencies for the rest of the year, a slim majority of analysts, 26 of 49, said economic data. Another 20 said interest rate differentials, and three said safe-haven demand.

Recent employment data suggest cracks are finally appearing in the world's largest economy's surprising resilience to rate hikes over the past year and a half. But the U.S. economy is still performing better than all of its peers.

The latest data from the Commodity Futures Trading Commission showed currency speculators were still overwhelmingly net-long on the U.S dollar, suggesting there was still plenty of support for the greenback.

"At the moment, we're still tactically long dollar and we think this will have further to run into year-end, primarily against currencies where they continue to show weak fundamentals. EUR/USD would be the primary case of that," said Simon Harvey, head of FX analysis at Monex Europe.

The euro zone economy shrank 0.1% last quarter and is expected to flat-line in this one, barely skirting a recession. The euro, after clawing back all of its losses for the year, is predicted to gain around 4.0% over the coming 12-months.

Median predictions from 72 foreign exchange strategists showed the common currency trading at $1.07, $1.08 and $1.11 in the next three, six and 12 months. Those estimates are broadly unchanged from an October survey.

The Japanese yen, the worst-performing major currency for the year, is expected to remain under pressure in the near-term.

Asked what is the weakest level the yen will trade against the dollar by year-end, 20 analysts who answered a separate question returned a median of 152/dollar.

However the currency, which has lost about a third of its value since 2021 including 13% this year alone, is expected to recoup most of its 2023 losses over the next 12-months.

The yen is expected to gain over 10% to change hands at 136/dollar in a year, the poll showed.

Sterling, already up around 1.5% in 2023, is forecast to gain 3.5% to $1.27 in a year.

Emerging market currencies are expected to take well into next year to post noticeable gains against a retreating U.S. dollar.

Source: Reuters

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Thomas

Bond

Economic

Foreign investors are setting the bar high when it comes to buying Indonesian bonds, as debt from other regions starts to look more attractive.

Yields on Indonesia's benchmark sovereign bonds need to rise to 7.5%, which is around 80 basis points higher than where they are now, said JPMorgan Asset Management and First Sentier Investors. Brandywine Global Investment said yields may have to be at least 300 basis points above their U.S. equivalent, compared with the current spread of around 200 basis points.

That shows investor sentiment towards Indonesian bonds, which were heavily sought after by emerging-market investors before Covid, is worsening due to a weak currency and narrow rate differential with the U.S.. Some funds are now gravitating towards bond markets, including those in Latin America (LatAm) that are benefiting from an easy monetary policy and benign inflation.

Investors can buy Brazilian bonds for higher yields compared to the likes of Indonesia as long as they can weather higher fiscal and political uncertainties, said Desmond Soon, a portfolio manager at Western Asset Management Co.

"LatAm countries are sort of high-octane, high-yield, and Asia is more mezzanine," Singapore-based Soon said, adding that he is also rotating some of his fund's exposure out of Indonesia in favour of peers like India.

Indonesian Bonds No Longer Darlings in Emerging Markets_1

Foreign investor apathy is dealing a blow to Bank Indonesia's (BI) efforts to stabilise its currency after outflows of about US$2.5 billion (RM11.68 billion) from rupiah debt in the last three months, the biggest in a year. Global funds now hold less than 15% of outstanding Indonesian government bonds from around 40% before the Covid, according to data compiled by Bloomberg.

The central bank issued new securities to allow short-term yields to rise, in hopes of attracting more inflows, while also buying some debt to build market confidence, but to no avail.

"BI has recently come back to start buying up some bonds because they know that the market is unravelling," Carol Lye, a portfolio manager at Brandywine Global Investment Management, said last month. "On a real yield spectrum, Indonesia does well on its own — but it's when you compare it to the rest of the markets that it doesn't shine as bright," said Lye who hadn't held Indonesian sovereign bonds for a year.

Increased sensitivity of Indonesian bonds to Treasuries is also capping rupiah bond yields. The 10-year U.S. yield fell 35 basis points in November after the U.S. Federal Reserve signalled it's done with hiking rates. Indonesian yields of the same tenor also dropped by about the same amount to around 6.7%.

Indonesian Bonds No Longer Darlings in Emerging Markets_2

Investors are now watching if BI will tighten its policy further after it surprised markets with an interest-rate hike in October and kept the door open for more. Indonesia is in a far better position than some of its peers in Asia when it comes to managing inflation, but it falls short in comparison with LatAm.

Price gains have been within BI's target since May, while the Philippines faces the risk of missing its price goal for a third straight year in 2024. Price pressures likely eased in Mexico, Chile and Colombia last month, while the Peruvian central bank is set to cut its benchmark rate for a third consecutive meeting.

Indonesia will need to continue hiking rates in this part of the cycle as U.S. rates stay high, said George Boubouras, the head of research at hedge fund K2 Asset Management in Melbourne. "To attract foreign capital, you just need to hike rates even more to make sure there's a good spread to U.S. Treasuries," he said.

Tide turning?

Still, some investors such as JPMorgan Asset Management are turning more constructive on some Indonesian debt, even as they caution that yields need to climb further.

The bank bought rupiah debt with a maturity of up to two years as it sees carry-and-roll in those tenors compensating for any U.S. Treasury volatility. The fund had taken profits on an earlier position in long-dated debt mid-year as the bonds rallied through 6.5%, he said.

First Sentier Investors has also bought two-year notes, and expects foreign investors to eventually return due to the nation's fundamentals, said Nigel Foo, the head of Asian fixed income. "Should these foreign investors come back, they will come back in a very big way," he said.

Source: Bloomberg

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Devin

Palestinian-Israeli conflict

Israel is no stranger to armed conflicts and full-scale wars.

However, unlike the previous conflicts, the war in Gaza is expected to take a heavy toll on the country's economy, in the short and long term, according to economists and analysts.

A further escalation of the conflict could result in a downgrade of Israel's sovereign debt rating, global credit rating agencies such as Fitch Ratings, Moody's Investors Services and S&P have warned in recent days.

S&P has already lowered Israel's credit outlook to negative, from stable, citing the risk that the conflict could broaden, with a more pronounced effect on the economy.

"The negative outlook reflects the risk that the … war could spread more widely or affect Israel's credit metrics more negatively than we expect," the rating agency said in a note.

Last month, Moody's placed the government of Israel's "A1" long-term foreign currency and local currency issuer ratings on review for downgrade. Previously, the outlook was stable.

It expects that a prolonged conflict waged on several fronts will have a severe and lasting impact on Israel's economy.

"While a short-lived conflict could still have credit impact, the longer lasting and more severe the military conflict, the greater its impact is likely to be on policy effectiveness, public finances and the economy," the rating agency said in a recent report.

Meanwhile, Fitch has warned that a major escalation could result in a negative rating action.

"This [the current war] could take the form of a wider and longer conflict, resulting in a sustained fiscal drain, both from higher spending and lower tax collection, as well as loss of human and material capital and severe economic disruption," it said.

The war began on October 7, when Hamas operatives attacked southern Israel, killing about 1,400 people and taking more than 200 hostages.

Israel retaliated with air strikes and a total siege of the enclave, with the Palestinian death toll currently at about 9,500.

Israel also launched attacks against southern Lebanon this weekend, raising fears that the conflict could engulf the region and affect the growth of regional economies.

Tech and tourism to be hit hard

The war will significantly affect the Israeli economy through strained labour supply, as well as lower investment and capital inflows, said the Institute of International Finance.

Despite Israel's robust economic foundation with ample foreign exchange reserves, low inflation, current account surpluses and modest debt, the latest war could inflict a heavy burden on the economy, said Garbis Iradian, chief economist for the Mena region and Central Asia at the IIF.

"A full-scale ground attack of Gaza could spiral into larger [and] prolonged regional war," he warned.

Such a scenario is expected to significantly affect the economy through lower private consumption, investment, and net exports, which would be aggravated by the strained labour supply, as the government has mobilised about 350,000 reservists – about 8 per cent of the working population.

A large departure of the labour force will damage several sectors of the economy, including the technology sector, the main driver of growth, according to analysts.

Private consumption and investment could fall significantly amid uncertainty and security concerns.

Moreover, an expansion of the war against Hezbollah or Iran could also cause significant damage to Israel's infrastructure, in addition to further loss of life.

"The immediate impact [of mobilising reservists] will be a downturn in output as production capacity constraints begin to bind, particularly in sectors with a high proportion of younger workers, such as the high-tech sector," Elliot Garside, an economist at Oxford Economics told The National.

"We expect the impact on the tourism sector to be concentrated in weaker tourism exports, which will spill over to higher unemployment and slower investment growth.

"Our preliminary estimates are that the combined loss to travel and transport services exports will be around 4 billion Israeli shekels [$1 billion] in 2023, and a 12-billion shekel loss during 2024. This represents a 0.3 per cent loss to 2023 gross domestic product and 0.7 per cent in 2024, heightening the trade deficit."

The economy has recovered relatively swiftly from past episodes of violent conflict and its dynamism benefits from a diversified high-tech sector as the main engine of growth, said Moody's.

However, this conflict is more severe than the previous episodes of violence.

"As a result, there is a risk of a diversion of resources, drop in investment and loss of confidence, which would undermine Israel's economic outlook," Moody's said in a recent report.

Israel spends about 4.5 per cent of its GDP on defence, considerably more than other Organisation for Economic Co-operation and Development countries.

While defence spending has declined as a share of GDP over the past two decades, it has typically increased during episodes of violence in the past. Moody's expects higher defence spending to add to the fiscal deficit.

"We expect a contraction in the Israeli economy by at least 4 per cent in the fourth quarter of this year, and a contraction of at least 5 per cent for the whole of 2024," said Mr Iradian.

US bank JP Morgan has also lowered its fourth-quarter economic forecast for Israel and has estimated that its seasonally adjusted GDP may shrink by 11 per cent when compared with the third quarter.

The lender's estimates are among the most pessimistic from Wall Street analysts so far.

However, the lender still expects Israel's GDP to grow by 2.5 per cent this year and by 2 per cent in 2024.

Against the backdrop of the war, the Bank of Israel's Research Department revised its forecast and now expects the economy to expand by 2.3 per cent in 2023 and by 2.8 per cent next year.

The central bank has proactively placed certain measures to combat the situation but analysts say the depth and duration of the impact on its economy remains uncertain.

The Bank of Israel's baseline scenario assumes a war that lasts one to six months and is focused mainly on Gaza.

Risks "might still skewed to the downside", JP Morgan analysts wrote in a note on October 27.

They added that "gauging the impact of the war on Israel's economy remains difficult both due to still very high uncertainty about the scale and duration of the conflict and the lack of high-frequency data at hand".

Israel's recent conflicts, including one with Hamas in 2014 that lasted about seven weeks and involved a ground assault on the territory and a 2006 war with Lebanon-based Hezbollah, "barely affected activity", they said.

However, the current war "has had a much larger impact on domestic security and confidence".

Since the outbreak of the war on October 7, the Israeli shekel has depreciated by 4 per cent against the US dollar.

The IIF expects that the Bank of Israel will be able to prevent further significant depreciation given its large net external creditor position (since foreign assets far exceed foreign liabilities).

Foreign exchange reserves managed by the central bank exceeded $200 billion, or 38 per cent of GDP, as of the end of September.

However, a sharp decline in exports would shift the current account from a surplus of about 2 per cent of GDP to a deficit of 2.5 per cent this year, it said.

Such a deficit, combined with the deterioration in non-resident inflows – including lower foreign direct investment and portfolio flows – would lead to a fall in official reserves from about $200 billion to the region of $150 billion by the end of 2024, the IIF said.

Israel's foreign debt stands at about 30 per cent of GDP, much lower than most emerging economies.

Looking ahead, the 2023-2024 national budget that was approved before the war will probably be amended, with substantially more spending allocated to defence and much less tax revenue due to the expected contraction in the economy next year.

There will also be an impact with 300,000 reservists on standby and the workforce directly impacted by the need for fighters.

"We expect the fiscal deficit to widen from 2.3 per cent of GDP in 2023 to 4.5 per cent of GDP in 2024 in our limited war scenario, and a deficit of at least 6 per cent of GDP in our prolonged war scenario," said Mr Iradian.

Counting the cost of war

According to Israeli Finance Minister Bezalel Smotrich, if the war lasts for six months, then the cost would amount to about $45 billion, which is equivalent to 10 per cent of GDP.

"It's hard to know how large the impact has been on GDP so far but around half of businesses reported in a recent survey that they expect revenues to drop by 50 per cent in October," Liam Peach, senior emerging markets economist at Capital Economics, said.

"Activity will bounce back in November and early next year but it looks to us, at this stage, that GDP in Israel may decline by around 2 per cent – seasonally adjusted, quarter on quarter – in the fourth quarter as a whole."

Meanwhile, Oxford Economics has downgraded the GDP growth forecast for Israel to 1.9 per cent, from 2.9 per cent for 2023, and 2.2 per cent, from 3.1 per cent for 2024, as the war continues.

"The deepest contraction in economic activity will be seen in the fourth quarter of 2023, although the impacts will still be intense during the beginning of next year," Mr Garside said.

The Economist Intelligence Unit expects a short but sharp recession, with a significant contraction in the final quarter of 2023.

This will be followed by an initially tentative recovery that will gather pace only in the second half of 2024, with economic performance normalising in 2025.

"In the near term, expect total shutdowns in some sectors followed by a slow return to normality," said Pat Thaker, editorial director for the Middle East and Africa at the EIU.

"For instance, Chevron shut down its offshore Tamar gasfield and the EMG pipeline that sends Israeli gas for processing in Egypt shortly after war broke out, although the larger Leviathan field continues to operate.

"Educational settings and businesses are beginning to open up, but to a limited extent. Consumer sentiment remains extremely poor and many businesses will remain affected by severe manpower shortages," she said.

Source: The National News

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Economic

Stocks

Central Bank

Fed officials keep additional hikes on the table

The US dollar continued recovering against all the other major currencies on Tuesday as several Fed officials reminded investors that the door to further hikes remained open.

Fed Governor Christopher Waller said yesterday that the 4.9% GDP growth rate for Q3 was a "blowout" performance that deserves watching closely, while Governor Bowman said she took the number as evidence the economy did not only "remained strong," but that it may have gained speed as well. Although Waller did not specifically refer to whether additional hikes are needed or not, Bowman said that the growing economy may indeed require a higher policy rate.

Chicago Fed President Goolsbee and Minneapolis Fed President Kashkari repeated that the rise in market-based interest rates likely represents a tightening of financial conditions, but neither ruled out additional hikes.

Unconvinced investors await Fed Chair Powell

Yet, despite the recovery in the dollar, investors were not largely convinced that another hike may be on the table. This is evident by the fact that opposite to the dollar, the 10-year Treasury yield slid yesterday, and by the implied path derived by Fed funds futures, which point to only around a 15% probability for one more quarter-point rate rise and around 90bps worth of rate cuts by the end of 2024. The slide in the yields may have been due to a solid auction of $48bn in 3-year notes with auctions of the 10- and 30-year bonds due out later this week.

What prompted investors to add to their cut bets was Friday's disappointing US employment report, but looking at the broader economic performance, there is nothing justifying so many basis points worth of rate reductions. Therefore, should US growth-related data continue to point to a resilient economy, there is ample room for upside adjustment and further recovery in the US dollar.

Today, although there is no top tier US data, the spotlight is likely to fall on a speech by Fed Chair Jerome Powell. If he echoes his colleagues' remarks that following the stellar economic performance in the third quarter, the chance for higher rates remains firmly on the table, or if he highlights the ‘higher for longer' mantra, the dollar is likely to extend its gains.

Stocks and yields take Fed talk with a grain of salt

Wall Street ended Tuesday's session in the green, with Nasdaq recording the most gains, as the pullback in Treasury yields may have helped high-growth mega cap stocks that are usually valued by discounting free cash flows for the quarters and years ahead. This suggests that only dollar traders took remarks by Fed officials seriously, and it remains to be seen whether Powell will be able to lift yields today, something that could prove negative for stocks.

After Powell, the next big test for the markets closely linked to expectations about the Fed's monetary policy path, may be next week's inflation data for October. The new estimate of the Atlanta Fed GDPNow model, which comes out the day after the CPI data could also be worth monitoring. Currently, the model projects a 2.1% growth rate for Q4.

Oil falls more than 4% after Chinese data

Oil prices fell yesterday, with WTI crude oil tumbling more than 4% and hitting its lowest since July. This may have been due to mixed Chinese data during the Asian session yesterday, which although suggested some improvement in domestic demand, they continued pointing to persistent risks. Imports snapped 11 straight months of declines in October, rising 3.0% y/y, but exports shrank 6.4% y/y, faster than a 6.2% decline in September.

A joined decision by Saudi Arabia and Russia to continue with their additional voluntary output cuts until the end of the year could have otherwise prove positive for the black liquid, but a recovery in OPEC exports by about 1mn barrels per day (bpd) since their August low suggests that there may still be much supply to be absorbed by oil-consuming countries. Fed Rhetoric Further Fuels the Dollar_1

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Chandan Gupta

Commodity

In addition to the internal dynamics of the gold market, it would be prudent to cast an eye on the bond markets.

Bond markets exert a substantial influence on gold, especially when bond yields experience an upswing, rendering gold relatively less attractive.

However, it's important to note that these factors don't operate in isolation, and there are instances where both can surge concurrently, particularly in times of geopolitical tumult—a factor that obviously means a lot in the current landscape.

Under the prevailing circumstances, the inclination to short gold does not seem particularly appealing.

Nevertheless, if we witness a descent below the underlying moving averages, it would merit serious consideration.

My opinion leans towards the strategy of buying gold when the price drops or after an upward breakout.

However, it is increasingly clear that the market is poised for its next big move that could surprise many, regardless of its direction.

In such a scenario, the prudent course of action is to wait for a significant breakthrough in one direction or the other, or, if you decide to commit, do so with a humble stance to minimize the risks.

While the outcome may be favorable to your position, it is essential to realize the unpredictability of the situation, where almost anything can happen in this environment.