A Look at the Day Ahead in U.S. and Global Markets

By Amanda Cooper

The dollar's supremacy has been a significant story in 2024. U.S. President-elect Donald Trump's proposed "America first" agenda, which includes trade tariffs, indicates that this narrative will likely persist into the next year.

China's leadership is considering allowing the yuan to weaken in 2025 as a buffer against potential higher tariffs from a second Trump presidency. According to sources familiar with the situation, Beijing recognizes the need for larger stimulus measures to counter the possible effects of heavy duties on its exports.

Trump has suggested implementing a 10% universal import tariff and a 60% duty on Chinese imports to the U.S. A weaker yuan seems almost inevitable, as Trump has previously criticized countries for devaluing their currencies to gain unfair advantages.

Beijing faces the challenge of balancing yuan depreciation enough to alleviate some tariff impacts without igniting a full-scale currency war.

In the short term, markets are nearly certain the Federal Reserve will cut rates by a quarter point next week, contingent on consumer inflation data. The November Consumer Price Index (CPI) is expected to show a 0.3% monthly increase overall and in core figures. Analysts do not foresee significant surprises, although recent trends in various sectors suggest fluctuating inflation dynamics.

Notably, natural gas prices rose by 25% last month, and used car prices experienced their largest hike since July, increasing by 1.3%. Rent inflation, flagged by the Federal Reserve Bank of Cleveland, is not expected to return to pre-pandemic levels until 2026.

Service-sector inflation remained stable in November, with wage inflation at 4%. While Fed policymakers hope inflation will align with the 2% target soon, many consumers are doubtful, especially given rising costs for essentials such as rent, groceries, and used cars.

The University of Michigan's consumer expectations survey forecasts a consistent inflation rate of 2.6% for the next year and a jump to 3.2% in five years. In real terms, wage increases are only 1.4%, lagging behind essential goods' price hikes of 2.1%.

In Canada, the Bank of Canada is widely anticipated to cut rates by half a point during its upcoming meeting, following a surprising rise in the unemployment rate last month that led to heightened expectations of a significant rate decrease.

Economists are concerned that the BoC may be overly aggressive with a 50-basis point cut, especially as other data suggest a relatively robust economy. A looming question remains regarding the potential impact on the Canadian economy if Trump follows through on his proposed 25% tariff on imports from Canada.

Key Developments to Watch for U.S. Markets on Wednesday:

• U.S. November consumer price index
• Bank of Canada rate decision
• U.S. 10-year Treasury note auction