Markets

A rising tide lifts all boats. Or in this case, a rising Chinese stock market lifts global risk sentiment. More fiscal spending, measures to stabilize the property sector, potential capital injections in the largest banks and forceful rate cuts are now also part of the toolkit announced earlier this week. European stock markets closed up to 2.35% (!) higher for the Eurostoxx50 with main US benchmarks extending their record race (+0.4%-0.6%) though closing off the day’s best levels. Most Asian stock markets show signs of some consolidation this morning, apart from China which adds another 5%-7% to an already record-week.

US eco data included a minor upward revision in the final Q2 print (3% Q/Qa), but especially consensus-beating durable goods orders (August) and lower weekly jobless claims (218k). Although second tier and coming ahead of PCE deflators (today) and ISM’s, ADP employment change and payrolls (next week) they did manage to swing the November Fed pendulum more into balance between a 25 bps and a 50 bps rate cut. Changes on the US yield curve ranged between +7 bps (2-yr) and -0.9 bps (30-yr).

Lower oil prices partly help explain the strong curve shift with Brent crude prices dropping from $75/b to $71/b over the past two days. The move is linked to talk that Saudi Arabia is ready to abandon its unofficial $100/b oil price target. The FT reported that they would boost output from December 1st to regain market share. Bullish risk sentiment and lower oil prices balanced out interest rate support for the dollar. The greenback was going nowhere for most of the session and even lost some ground in the final stages of US trading. EUR/USD closed at 1.1177 from a start at 1.1133.

Today’s agenda contains first national European CPI indications for September (France, Spain, Belgium). Together with already released awful September PMI’s, they are the only input for the ECB in the short intermeeting period between September and October. PMI brough the possibility of a 25 bps rate cut back on the radar from a market point of view. We’re still in favour of a pause. When it comes to inflation numbers, ECB Lagarde at the press conference already “hedged” today and next month’s numbers by saying that they could fall somewhat further now before ticking up into year-end as energy-related base effects turn around.

We’d be surprised though if markets pick up that nuance today, suggesting that lower inflation numbers could add to short term easing bets. Any potential euro weakness should remain short-lived going into next week’s big US eco week.

News & Views

Tokyo core inflation excluding fresh food printed at 2% Y/Y (from 2.4%) this month, matching the BoJ target. This move was mainly due to a reinstalment of measures to ease the cost of utilities (gas and electricity). The government measures are estimated to have reduced inflation by about 0.5%. A more strict core measure, excluding fresh food and energy was unchanged at 1.6%. Tokyo CPI data are seen as a good pointer for the national figure that will be released later next month.

The October CPI reports are more important for BoJ policy setting as they might include price adjustments at the start of the fiscal second half of the year and give an indication on the degree that corporates are passing through the cost of higher wages. The Japanese yen didn’t respond to the inflation data, but suffered a setback (USD/JPY 146.50 from 145) after BoJ easing advocate Takaichi made it to the LDP leadership contest runoff (facing Ishiba).

The Bank of Mexico for the second consecutive meeting lowered its policy rate by 25 bps to 10.50%. Vice governor Jonathan Heath vote for an unchanged decision. The bank was mildly constructive in the inflation outlook going forward. Annual headline inflation decreased from 5.57% in July to 4.66% in the first fortnight of September. Core inflation continued trending downwards(3.95% Y/Y). It estimated that, although the outlook for inflation still calls for a restrictive monetary policy stance, its evolution implies that it is adequate to reduce the level of monetary restriction.

The forecasts for headline and core inflation were revised slightly downwards for some quarters in the short term. Headline inflation is still expected to converge to the target in the fourth quarter of 2025. The Mexican CB targets 3.0% +/- a 1.0% tolerance band. The Mexican peso which traded in the defensive since April but came off the early September lows recently, closed yesterday’s session little changed near USD/MXN 19.63.

Graphs

GE 10y yield

The ECB cut policy rates by 25 bps in June and in September. Stubborn inflation (core, services) make follow-up moves less evident. We expect the central bank to stick with the quarterly reduction pace. Disappointing US and unconvincing-to-outright-weak EMU activity data dragged the long end of the curve down. The move accelerated during the early August market meltdown.

US 10y yield

The Fed kicked off its easing cycle with a 50 bps move. It is headed towards a neutral stance now that inflation and employment risks are in balance. Conservative SEP unemployment forecasts risk being caught up by reality and with it the dot plot (50 bps more cuts in 2024). We hold our call for two more 50 bps cuts this year. Pressure on the front of the curve and weakening eco data keeps the long end in the defensive for now as well.

EUR/USD

EUR/USD moved above the 1.09 resistance area as the dollar lost interest rate support at stealth pace. US recession risks and bets on fast and large rate cuts trumped traditional safe haven flows into USD. An ailing euro(pean economy) only briefly offset some of the general USD weakness. EUR/USD’s dollar-driven ascent is nearing resistance around 1.12 again.

EUR/GBP

The BoE delivered a hawkish cut in August. Policy restrictiveness will be further unwound gradually on a pace determined by a broad range of data. The strategy similar to the ECB’s balances out EUR/GBP in a monetary perspective. But the economic picture is increasingly diverging to the benefit of sterling. EUR/GBP succumbed to horrible European September PMI’s. Support at 0.84 broke and brings the 2022 low (0.8203) on the radar.

Source: ACTIONFOREX

Source: EuroNews

US Treasury curve dives into cuts and risks being caught by upside surprises

While markets are prepared for more US data disappointments, the durable goods orders and jobless claims both performed better than consensus. The outperformance wasn’t much, but nevertheless moved the 2Y UST yield higher by some 5bp and shaved off 4bp of cuts for 2024. Such a reaction really underlines the pessimistic positioning of markets and the expectation of an economy grinding to a halt.

In a broader sense, recent economic surprises have improved recently, yet the front end of the US Treasury curve continues to dive deeper into cuts. Of course, positive economic surprises are also more likely when consensus turns more pessimistic, but even then the latest data points are far from recessionary territory. A slowdown is still our baseline, but the sentiment in rates markets may see some recovery if the data doesn’t deteriorate as promptly as feared, potentially helping the back end of the curve retrace higher.

Next move in EUR curve likely to be driven by US

EUR markets remain sensitive to the idea of an October European Central Bank cut and news headlines about Governing Council members supporting an October cut have added fuel to the fire. At the same time, EUR rates are very sensitive to the US economic outlook, which based on Thursday’s data is showing pockets of resilience. Netting these two out meant little change in the EUR rates curves.

Overall we expect EUR rates to trade sideways for the time being. And although we don’t think an October cut will happen, we also don’t think there will be enough data until then to conclude that with more certainty. The next move for the EUR curve could therefore come from the US, where a recovery in sentiment could provide some upward pressure on the back end of global curves.

US economic surprises making a recovery

Today's events and market view

Friday’s data highlight is the personal income and spending report, with the core personal consumer expenditure deflator the key number within it. Core CPI came in at a relatively “hot” 0.3% month-on-month, but the core PCE should come in at 0.2% given the lower weighting for housing. As such, this should confirm that inflation is not a barrier to further Fed cuts. We will also get the final University of Michigan consumer sentiment index which could be followed more closely after the Conference Board's disappointing report earlier this week. There will also be a busier slate of Fed speakers to watch including Susan Collins, Adriana Kugler and Michelle Bowman.

In the eurozone, the main events are ECB related, with speeches from Olli Rehn, Joachim Nagel and Philip Lane. On the data side, only the ECB's results of the consumer inflation expectations survey are of note.

Italy will be auctioning 5Y and 10Y bonds as well as floating rate notes for a total of up to €8.75bn.

Macro:

The number of Americans filing new applications for unemployment benefits dropped to a four-month low last week, suggesting that the labour market remained fairly healthy.

The upbeat outlook on the economy was underscored by other data on Thursday showing corporate profits increased at a more robust pace than initially thought in the second quarter. Strong profit growth should help to underpin the labor market and potentially shield the economy from a recession.

The economy's resilience could make it harder for the Federal Reserve to deliver another 50 basis points interest rate cut in November as some investors are hoping.

"The Fed's strong start to unraveling its monetary restraint with an aggressive 50 bps rate cut may not continue if the economy's ship remains well away from the shoals of recession," said Christopher Rupkey, chief economist at FWDBONDS.

"(Fed chair Jerome) Powell does not want to see the unemployment rate tick any higher and the weekly jobless claims data suggest this will not be the case."

Initial claims for state unemployment benefits dropped 4,000 last week to a seasonally adjusted 218,000 for the week ended Sept 21, the lowest level since mid-May, the Labor Department said. Economists polled by Reuters had forecast 225,000 claims for the latest week.

Unadjusted claims decreased 5,957 to 180,878 last week, with notable declines in New York and Texas. No state reported a rise in filings in excess of 1,000.

Though the labour market has lost momentum amid declining job openings and a step-down in hiring, layoffs have remained low and there are no signs of deterioration.

But a strike by about 30,000 machinists at Boeing, which has forced the aerospace company to announce temporary furloughs of tens of thousands of employees, including what it said was "a large number of US-based executives, managers and employees" could boost claims in the weeks ahead.

Striking workers are not eligible for unemployment benefits, but the work stoppage could cause employment disruptions at Boeing's suppliers in addition to the temporary furloughs.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 13,000 to a seasonally adjusted 1.834 million during the week ending Sept 14, the claims report showed.

The so-called continuing claims have dropped from more than 2-1/2-year highs touched in July, attributed to policy changes in Minnesota that allowed non-teaching staff in the state to file for unemployment aid during the summer school holidays.

The continuing claims data covered the week during which the government surveyed households for September's unemployment rate. Continuing claims fell between the August and September survey week. The jobless rate slipped to 4.2% in August after rising to 4.3% in July. The increase in the unemployment rate from 3.4% in April 2023 as a surge in immigration boosted labour supply has raised fears of rapid labour market deterioration.

The US central bank last week cut interest rates by 50 basis points to the 4.75%-5.00% range, the first reduction in borrowing costs since 2020, which Powell said was meant to demonstrate policymakers' commitment to sustaining a low unemployment rate.

Financial market saw a roughly 54.2% chance of another half-percentage-point rate cut at the Fed's Nov 6-7 policy meeting, according to CME's FedWatch tool. The odds of a 25 basis points cut were around 45.8%.

Strong economic growth

A separate report from the Commerce Department's Bureau of Economic Analysis showed corporate profits including inventory valuation and capital consumption adjustments increased at a US$132.5 billion (RM548.7 billion) annualised rate in the second quarter. They were revised up from the US$57.6 billion pace estimated last month.

The revision reflected a sharp upgrade to domestic profits of non-financial corporations, which are now estimated to have increased US$108.8 billion, instead of US$29.2 billion. Income at the disposal of households was also solid.

As a result, gross domestic income growth, which measures economic activity from the income side, was revised up to a 3.4% rate last quarter from the initially estimated 1.3% pace. GDI rose at an upwardly revised 3.0% pace in the January-March quarter from the previously reported 1.3% rate.

Gross domestic product growth was unrevised at a 3.0% rate last quarter, in line with economists' expectations. In principle, GDP and GDI should be equal, but in practice they differ as they are estimated using different and largely independent source data.

The government revised the national accounts data from the first quarter of 2019 through the first quarter of 2024. The revisions showed economic growth and corporate profits were stronger in 2023 than previously estimated.

The revision narrowed the gap between GDP and GDI, which some economists have argued suggested that GDP was overstating the economy's health.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 3.2% rate last quarter. That was revised up from the previously estimated 2.1% pace. Gross domestic output advanced at a 2.3% pace in the first quarter, revised up from the previously reported 1.4% pace.

Source: Theedgemarkets