The combination of a slightly less hawkish stance from the Federal Reserve and a positive response to the Treasury refunding announcement has stirred up risk appetite in the financial markets. This resurgence in optimism is kindling hopes for a potential year-end Santa Claus rally, which, if realized, could further erode the strength of the US dollar. A crucial factor to monitor in this scenario is the performance of non-farm payrolls, particularly if they come in weaker than anticipated.
The recent announcement from the Treasury, indicating that it will borrow at a slower pace than initially expected in Q4 ($776 billion versus $852 billion), has contributed to this market sentiment. Additionally, the Treasury’s decision to reduce the rate of long-term bond sales, specifically for 10 and 30-year maturities, underscores its responsiveness to the rising term premiums, indicating a cautious approach to market dynamics.
Furthermore, the Federal Reserve’s explicit acknowledgment of tighter financial conditions impacting economic activity, hiring, and inflation has created an atmosphere where the necessity to further raise interest rates seems less pressing. This development has provided a significant boost to bond markets, emboldening bond bulls and, in turn, supporting overall risk appetite.
In this context, a non-farm payrolls report that falls below expectations could serve as an additional catalyst for an upswing in risk appetite, intensifying the factors currently contributing to the downward pressure on the US dollar. This aligns with the broader market sentiment of a potentially more dovish stance from the Federal Reserve and a market landscape characterized by optimism and risk-taking.