Political Betting and Critical U.S. Data Fuel Market Turbulence Ahead of Election

Political betting pricing intensifies less than a week before the presidential election, while anticipated U.S. data further fuels market turbulence. The ICE BofA Move Index climbed to its highest level of the year this week, signaling that traders are recalibrating positions amid rising volatility. For the remainder of the week, growth and labor market figures are expected to shed light on the potential extent of Federal Reserve rate cuts, followed by the November 5 U.S. elections and the November 7 policy decision, which will shape market sentiment.

While traditional polls assign a 50-50 probability to the candidates, political prediction markets are pricing a 60% or higher chance of victory for Republican candidate Donald Trump. As many observers begin to view prediction markets as more competent than traditional polls, the potential impact of a Trump victory is resonating more strongly across global markets.

An earlier survey reflected expectations that, regardless of the winning candidate, the post-election period in the U.S. would see widening fiscal deficits and higher inflation. However, following a potential Trump victory, a deeper fiscal deficit is expected, and expectations are rising that tariff policy will drive higher inflation. These projections push the U.S. bond market towards its worst monthly performance since September 2022.

Since early October, U.S. Treasury bonds have faced intense selling pressure, driving yields above 4% for the first time since early August. While the election results will be critical in determining whether this momentum in yields continues, some economists caution that it may signal the beginning of a sustainable rise. Given resilient economic growth, persistent inflation, and the risk that the Fed may slow or even halt its rate cuts, 5-year bond yields are forecast to potentially rise to 4.5% in the coming quarter, currently standing around 4.1%.

Treasury yields pulled back slightly following a surprising drop in job openings reported on Tuesday but rebounded as a measure of consumer confidence rose. The U.S. Bureau of Labor Statistics report on job openings showed the lowest levels since early 2021 in September, with layoffs increasing in line with a slowdown in the labor market. Available positions fell from a downwardly revised 7.86 million in August to 7.44 million. Economists surveyed by Bloomberg had a median forecast of 8 million positions.

The data supports survey findings indicating that employers are adopting a more cautious approach to hiring or delaying recruitment and continued jobless claims figures, which imply that labor supply absorption is slowing. While the figures generally show that the labor market remains healthy, the cooling trend continues. However, it is challenging to assess the pace of this cooling due to fluctuations caused by recent hurricanes, labor strikes, and uncertainties around the U.S. elections. Similarly, these factors are expected to weigh on the payroll figures due to be released on Friday.

Meanwhile, consumer confidence saw its largest rise since March 2021 in October, buoyed by optimism around the economy and labor market. The share of those reporting plentiful jobs rose to 35.1%, marking the highest increase since June 2021, while those saying jobs are hard to get fell to 16.8%. Consumers also reported expectations for improved business conditions, and those anticipating that their financial situation will improve over the next six months has reached its highest level in two years.

At the end of the day, widespread belief persists that the current rate levels, exerting a restrictive effect on the economy, will continue to ease as inflation progresses toward the Fed’s target. To justify a different approach, policymakers would need to see surprising readings in labor reports or inflation figures, signaling a gradual continuation of rate cuts.

Markets are pricing in a 42-basis-point cut by year-end while also questioning the likelihood of a pause in the first quarter of next year. This week's data will be scrutinized for clues on this matter, and given the major developments expected next week, there will be plenty of information to digest.

Gold Soars to Record High as Traders Seek Shelter from Election Turbulence

Traders seeking to avoid the turbulence caused by the U.S. presidential elections have flocked to safe-haven assets, pushing gold to a new all-time high of $2,790 per ounce. Markets are focused on Trump’s odds of winning the race, and despite surprising increases in U.S. bond yields, flows into precious metals are rising due to higher inflation expectations.

On the other hand, expectations that the Fed will slow its rate cuts have strengthened following recent strong U.S. data. This is a factor strengthening the U.S. dollar and slowing the momentum of precious metals. Markets will examine this week's critical data to gain further insight into the Fed’s easing path. A softer labor market and continued easing in inflation could fuel faster rate-cut expectations and serve as a tailwind for precious metals. Conversely, pressure on metals could increase.