Mike Dolan’s outlook for the day ahead for US and global markets
After 30 months of extraordinary monetary pressure, the Federal Reserve has finally decided to cut interest rates this week — now it ‘s just a matter of how much .
As China released weak industrial and retail sales data on Saturday, and the F.B.I.Republican presidential candidate Donald Trump on Sunday
But investors are focused on growing speculation that the Fed’s first rate cut on Wednesday will be 50 basis points rather than 25 basis points — especially since some viewed last week’s news reports as a sign that Fed officials may stick to the traditional expected stance.
World markets were relatively quiet on Monday, with centres mostly in Japan and mainland China closed for holidays.
However, the rebound seen late last week — which brought the Wall Street equity benchmark (.SPX) back to within 1% of its all-time high — looks likely to continue on Monday. Stock futures were higher, led by the small-cap Russell 2000 (.RUT) .
Fed futures are currently predicting a 40 basis point rate cut on Wednesday, with a more than 60% chance of a 50 basis point cut rather than a 25 basis point cut. Just as importantly, they plan to cut interest rates by 120 basis points before the end of the year.
As short-term Treasury yields return to 2022 levels, the US dollar (.DXY) bears the brunt.
The two-year Treasury yield fell below 3.55% for the first time in two years, widening the gap between the 2-year and 10-year yield curve to the largest since June 2022 at about 9 basis points.
The US dollar bore the brunt of the Fed-focused trading, with the US dollar index (.DXY) falling sharply to its lowest level in over a year once again. The MSCI emerging market currency index (.MIEM00000CUS) rose around 0.25% to a record high.
The relative interest rate game between major currencies dominates. Further by the Bank of JapanJapan’s yen rose to over 140 per dollar for the first time since July 2022, and interest rate hikes may remain in the cards.
Sterling also rose as the market assumed the Bank of England would not consider a second rate cut this year at its meeting on Thursday – partly in anticipation of the UK’s new Labour government’s first budget next month.
China’s weaknesses
With mainland Chinese markets closed on Monday, it is difficult to gauge the weekend’s reaction to China’s sub-optimal economic data.
The latest data showed China’s industrial output growth fell to a five-month low in August, while retail sales and new home prices also slowed and weakened, reinforcing the need for aggressive stimulus measures from the government, which has so far been conspicuously short of stimulus.
The weak data makes Beijing ‘s 5% growth target look further away and weak bank credit data was also released on Friday.
Perhaps most worryingly, the relentless property grab has gone largely unnoticed by authorities. In August, new home prices in China fell at the fastest pace in more than nine years – only two of the 70 cities surveyed recorded monthly and annual price increases in August.
However, Hong Kong’s Hang Seng Index (.HSI) rose on Monday as the offshore yuan strengthened against a generally weaker dollar globally.
On the political front, the race for the White House took a new turn after the US Secret Service foiled an apparent assassination attempt on Trump.
Trump has fallen behind Democratic nominee Kamala Harris in betting markets since last week’s televised debate, and she remains the favorite to win the presidency in November.
European stocks were unchanged.
But in business news, France’s Rexel (RXL.PA) on SundayRejected a bid from QXO (QXO.O) led by billionaire Brad Jacobs .
Key developments on Monday that could provide further direction for US markets:
* New York Fed September manufacturing survey
*Speech by Philip Lane, Chief Economist of the European Central Bank
* U.S. Treasury sells 3-month, 6-month Treasuries
The views expressed are those of the author. They do not reflect the views of Askume News, which is committed to integrity, independence and non-partisanship in accordance with the principles of trust.
