Investment Daily: US Stocks Rose as Investors Assessed Remarks from Fed Officials

Economic

Stocks

Summary:

US stocks rose and Treasuries ended little changed on Fed comments; European stocks rose as government bond yields mostly fell; Asian stocks were mixed.

Markets

US equities ended modestly higher on Monday as investors assessed remarks from Fed officials on the outlook for further interest-rate cuts. The S&P 500 gained 0.3%.

US Treasuries ended little changed as investors weighed Fed officials’ remarks, US PMI readings and the decline in oil prices. 2-year yields stayed at 3.59% as 10-year yields edged 1bp higher to 3.75%.

European stock markets were higher on Monday, as soft eurozone business activity readings strengthened the case for further monetary easing by the ECB. The Euro Stoxx 50 rose 0.3%. The German DAX rose 0.7%, and the French CAC edged up 0.1%. In the UK, the FTSE-100 added 0.4%.

European government bonds mostly rose (yields fell) as eurozone flash PMIs signalled downbeat momentum in the region. 10-year German yields fell 5bp to 2.16%, as 10-year French yields were down 2bp to 2.94%. In the UK, 10-year gilt yields rose 2bp to 3.92%.

Asian stock markets lacked clear direction on Monday. China’s Shanghai Composite gained 0.4% amid investor optimism over more policy stimulus. This followed a 10bp cut to the 14-day reverse repo rate by the PBoC at its open market operations (which was likely a catch-up move to the 10bp cut to the 7-day reverse repo rate back in July). Hong Kong’s Hang Seng ended largely flat (-0.1%). Elsewhere, Korea’s Kospi was up 0.3%, India’s Sensex rose 0.5%, and ASEAN markets were mixed. Japan’s market was closed for a holiday.

Crude oil prices started the week lower amid ongoing concerns over the global demand outlook while investors continued to monitor geopolitical developments in the Middle East. WTI for November delivery fell 2.2% to settle at USD70.4 a barrel.

Key Data Releases and Events

Releases yesterday

In the US, the S&P composite PMI edged lower in September, driven primarily by a deterioration in the manufacturing sector, although the services index also ticked down. Nonetheless, the composite reading is still comfortably in expansion territory, consistent with solid growth.

In the eurozone, the composite PMI dropped below 50 (thereby implying contraction) for the first time since February with both the manufacturing and service sectors weakening. Some of the softening in the service sector reflected an unwinding of the boost to activity seen in France during the Olympics. However, German manufacturing and services also weakened.

In the UK, the flash PMIs also declined but, unlike the eurozone, remained in expansion territory for the 11th successive month.

Investment Daily: US Stocks Rose as Investors Assessed Remarks from Fed Officials_1

The Reserve Bank of Australia still focuses on the slower-than-expected disinflation progress and is expected to keep its policy rate unchanged.

In Germany, the IFO business climate index is expected to fall for a fourth consecutive month, mirroring the downbeat messages from latest PMI readings.

In the US, the Conference Board consumer confidence indicator has risen for the last two months, despite evidence that the labour market continues to cool. Forecasters expect a further modest increase in confidence in the September reading. The Case-Shiller house price index is expected to rise at a similar pace to that seen in recent months.

To stay updated on all economic events of today, please check out our Economic calendar

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S&P Global Inc.

Economic

Data Interpretation

On September 23, S&P Global released the U.S. S&P PMI for September:

Flash U.S. Manufacturing PMI at 47.0 (expected: 48.5, August: 47.9). 15-month low.

Flash U.S. Services Business Activity Index at 55.4 (expected: 55.3, August: 55.7). 2-month low.

Flash U.S. PMI Composite Output Index at 54.4 (August: 54.6). 2-month low.

Flash U.S. Manufacturing Output Index at 48.9 (August: 48.2). 2-month high.

In September, the growth in business activity in the U.S. remained robust, indicating a continued expansion of the economy in the third quarter. However, the growth across various sectors remained uneven. The services sector experienced further solid expansion while manufacturing output declined slightly for the second consecutive month. The growth rate of new orders in the services sector was slightly lower than in August, whereas the decline in new orders for manufacturers was the most significant in 21 months.

Expectations for business over the next year deteriorated to the lowest level in nearly two years, primarily due to a drop in confidence within the services sector, as concerns about economic and demand prospects arose, often linked to the uncertainties surrounding the presidential election. In contrast, confidence in the manufacturing sector remained resilient.

In September, the employment figures experienced a decline for the second consecutive month. However, due to a reduction in unemployment within the service sector, the overall decrease was minimal and less than the drop observed in August. Concurrently, the decline in manufacturing employment marked the largest drop since January 2010, as an increasing number of companies reported the necessity to scale back operational capacity due to sluggish sales.

The average prices of goods and services rose at the fastest rate since March. Rising costs fueled this price increase, resulting in inflation rates for manufacturing and service sales prices reaching a six-month high, surpassing the long-term averages observed prior to the pandemic, indicating a rise in inflation.

U.S. September PMI

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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FED

Remarks of Officials

Central Bank

On Monday, September 23, Chicago Fed President Goolsbee, Atlanta Fed President Bostic, and Minneapolis Fed President Kashkari all expressed support for the Fed's decision last week to cut the benchmark interest rate by 50 basis points to a range of 4.75%-5%, acknowledging that current rates still exert substantial pressure on the U.S. economy.

Chicago Fed President Goolsbee:

I'm pleased with the Fed's 50 bps rate cut. Given policymakers' confidence in inflation returning to our target of 2%, we must consider employment risks alongside inflation. In the current context, maintaining interest rates at their highest levels in a decade does not make sense.

Policy rates are far above the neutral level of around 3%, as estimated by the Fed. In the next twelve months, we have a long way to go to bring rates down to a neutral level. If we want a soft landing, we can't be behind the curve. More rate cuts might be necessary over the coming year as interest rates need to come down significantly.

Atlanta Fed President Bostic:

The Fed has made significant progress in fighting inflation. Core PCE inflation rose at an annualized pace of 1.7% in the three months ending July, well below our 2% target. Excluding housing, core services prices are moderating.

Risks in the labor market have increased due to rising unemployment, slower hiring, and declining job openings from peak levels in 2022, but the labor market is not yet flashing red.

The U.S. economy is rapidly normalizing. As inflation approaches our goal and the labor market comes into better balance, it's time to return rates to neutral levels. Last week's 50-bps cut put the Fed in a better position policy-wise. If inflation rebounds, we can slow the pace of easing, and if the labor market weakens further, we can accelerate policy easing.

Minneapolis Fed President Kashkari:

I endorse last week's 50-bps rate cut decision as inflation has cooled substantially, nearing the Fed's 2% objective. Meanwhile, risks have shifted from high inflation to concerns about a weaker labor market, justifying lower federal funds rates.

Despite uncertainties in the U.S. fundamental economy, growth and consumer spending remain robust. I anticipate the Fed's policy rate will reach 4.4% by the end of 2024 and decline further to 3.4% by late 2025. Two more 25-bps cuts are expected later this year.

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ACY

Economic

Among the G10 currency group, both the British Pound (GBP) and the Euro (EUR) have emerged as top performers. The Bank of England (BoE), while choosing not to implement drastic interest rate cuts, has fortified the GBP’s position as a high-yielding currency. This resilience has allowed the pound to capitalize on an improving global investor outlook, making it an attractive option for carry trades and international investment.

The cautious stance of the BoE contrasts with the U.S. Federal Reserve, which has started its monetary easing cycle with a bolder 50 basis point (bps) rate cut. Meanwhile, the European Central Bank (ECB) has taken a more conservative approach, opting for a smaller rate reduction, adding to the nuanced dynamics within the Eurozone.

The Battle of Central Banks European Currencies Amid Diverging Rate Cuts_1

Other European currencies, including the Norwegian Krone (NOK) and Swedish Krona (SEK), have also felt the effects of improving market confidence, but their trajectories have diverged notably. The SEK has strengthened, supported by the generally positive investor sentiment and Sweden’s stable economic outlook. On the other hand, the NOK has struggled, largely due to external pressures. Falling oil prices, coupled with the International Energy Agency’s (IEA) projections of reduced demand from China, have dampened the prospects for the Norwegian economy, keeping the NOK underperforming.

Despite Norges Bank maintaining relatively higher interest rates to support the currency, the NOK has not mirrored the GBP’s upward momentum, underscoring the challenges posed by global commodity market volatility.Looking ahead, the monetary policy updates from the Swedish Riksbank and the Swiss National Bank (SNB) are expected to reflect continued easing, with additional rate cuts likely. While these anticipated moves have not yet led to a significant weakening of the Swiss Franc (CHF) or the SEK, market conditions could compel the SNB to take more aggressive action. A larger 50 bps rate cut from the SNB may become necessary to achieve desired adjustments in the currency’s value, especially if external pressures such as slowing global growth and inflation differentials persist.

The Battle of Central Banks European Currencies Amid Diverging Rate Cuts_2

As the landscape evolves, the interaction between central bank policies and market forces will continue to play a critical role in shaping the outlook for European currencies.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Alex

Forex

West Texas Intermediate (WTI) US crude Oil prices oscillate in a narrow trading band, just above mid-$70.00s during the Asian on Tuesday and remain well within the striking distance of a nearly three-week top touched the previous day.

Israel's airstrikes against Iranian-backed Hezbollah sites in Lebanon killed nearly 500 people on Monday and raises the risk of a broader conflict in the Middle East. This may impact supply in the key Oil producing region, which, along with worries that a tropical storm may impact output in the US, turn out to be key factors acting as a tailwind for the black liquid.

Meanwhile, the US Dollar (USD) struggles to capitalize on its recent bounce from the YTD low touched in the aftermath of the Federal Reserve's (Fed) jumbo interest rate cut last week and bets for more aggressive policy easing going forward. This is seen underpinning demand for USD-denominated commodities and lending some support to Crude Oil prices.

The upside, however, remains capped amid a bleak global economic outlook. The fears resurfaced after the flash PMIs released on Monday showed that business activity in the Eurozone unexpectedly contracted sharply in September. This comes on top of concerns about fuel consumption in China – the world's largest Oil importer – and acts as a headwind for the commodity.

The aforementioned mixed fundamental backdrop warrants some caution before placing aggressive directional bets around Crude Oil prices as traders opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain on speeches by influential FOMC members and the release of the US Personal Consumption Expenditures (PCE) Price Index on Friday.

Source: FXSTREET

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Cohen

Forex

The Japanese Yen (JPY) remains steady against the US Dollar (USD) on Tuesday. However, it faces downward pressure amid increasing concerns that the Bank of Japan (BoJ) is not hurrying to raise interest rates. Following the BoJ's policy decision on Friday, Governor Kazuo Ueda noted that although Japan's economy is experiencing moderate recovery, signs of underlying weakness persist.

Japan’s Finance Minister Shunichi Suzuki stated on Tuesday that he is “monitoring the impacts of central banks' monetary policies.” Suzuki expressed his expectation that the Bank of Japan will implement appropriate monetary policy measures while maintaining close coordination with the government.

The USD/JPY pair may weaken due to increasing expectations for further rate cuts by the US Federal Reserve (Fed) in 2024. According to the CME FedWatch Tool, markets are pricing in a 50% likelihood of a 75 basis point reduction, bringing the Fed's rate to a range of 4.0-4.25% by the end of this year.

Daily Digest Market Movers: Japanese Yen remains subdued amid the dovish BoJ

The Jibun Bank Japan Composite Purchasing Managers Index (PMI) declined to 52.5 in September, down from a final reading of 52.9 in August, which was the highest in 15 months. Despite this decrease, it marks the eighth consecutive month of growth in private sector activity this year, primarily driven by the service sector. The Services PMI increased to 53.9 in September, up from a final 53.7 in the previous month.

The S&P Global Composite PMI grew at a slower rate in September, registering 54.4 compared to 54.6 in August. The Manufacturing PMI unexpectedly dropped to 47.0, indicating contraction, while the Services PMI expanded more than anticipated, reaching 55.4.

Minneapolis Fed President Neel Kashkari said on Monday that he believes there should be and will be additional interest rate cuts in 2024. However, Kashkari expects future cuts to be smaller than the one from the September meeting, per Reuters.

Chicago Fed President Austan Goolsbee noted, “Many more rate cuts are likely needed over the next year, rates need to come down significantly.” Additionally, Atlanta Fed President Raphael Bostic said Monday that the US economy is close to normal rates of inflation and unemployment and the central bank needs monetary policy to "normalize" as well, per Reuters.

On Monday, Japan's new "top currency diplomat," Atsushi Mimura, stated in an interview with NHK that the Yen carry trades accumulated in the past have likely been mostly unwound. Mimura cautioned that if such trades were to increase again, it could lead to heightened market volatility. "We are always monitoring the markets to ensure that does not happen," he added.

Japan's Consumer Price Index (CPI) increased to 3.0% year-on-year in August, up from 2.8% previously, marking the highest level since October 2023. Additionally, the Core National CPI, excluding fresh food, reached a six-month high of 2.8%, rising for the fourth consecutive month and in line with market expectations.

Federal Reserve Chair Jerome Powell commented on the aggressive 50 basis point rate cut, saying, “This decision reflects our increased confidence that, with the right adjustments to our policy approach, we can maintain a strong labor market, achieve moderate economic growth, and bring inflation down to a sustainable 2% level.”

Technical Analysis: USD/JPY holds position above the nine-day EMA near 143.50

USD/JPY trades around 143.70 on Tuesday. Daily chart analysis indicates that the pair is moving within a descending channel, signaling a bearish trend. Furthermore, the 14-day Relative Strength Index (RSI) is just below the 50 level, reinforcing the prevailing bearish sentiment.

On the downside, the USD/JPY pair may test the nine-day EMA at the 143.01 level. A break below this level could lead the pair to explore the 139.58 region, marking its lowest point since June 2023.

Alternatively, immediate resistance is identified at the upper boundary of the descending channel, around the 144.30 level. A breakout above this level could enable the USD/JPY pair to challenge the psychological barrier of 145.00.

Source: FXSTREET

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Owen Li

Forex

Gold price (XAU/USD) extends its consolidative price move for the second straight day on Tuesday as bulls turn cautious after the recent rise to a fresh all-time peak touched the previous day amid slightly overbought conditions on the daily chart. The downside remains cushioned in the wake of bets for more aggressive easing by the US Federal Reserve (Fed), which caps the US Dollar (USD) recovery from the YTD peak touched in reaction to a jumbo rate cut last week.

Apart from this, persistent geopolitical risks stemming from the ongoing conflicts in the Middle East, along with the US political uncertainty ahead of the November election and worries about an economic slowdown, should underpin the safe-haven Gold price. That said, the underlying bullish tone across the global equity markets keeps a lid on the safe-haven XAU/USD, ahead of this week's release of the US Personal Consumption Expenditures (PCE) Price Index on Friday.

Daily Digest Market Movers: Gold price remains supported by further Fed rate cut bets, geopolitical risks

Bets that the Federal Reserve will further lower borrowing costs by 125 basis points in 2024 after last week's jumbo 50 bps rate cut pushed the non-yielding Gold price to a fresh record high on Monday.

According to the CME Group's FedWatch Tool, investors are now pricing in another oversized rate cut at the November policy meeting, which caps a modest US Dollar recovery from the YTD low.

Minneapolis Fed President Neel Kashkari noted on Monday that the balance of risks had shifted away from high inflation to a further weakening of the labor market, warranting a lower interest rate.

Adding to this, Atlanta Fed President Raphael Bostic said that the recent data show convincingly that the US is on a sustainable path to price stability and that risks to the labour market have increased.

Chicago Fed President Austan Goolsbee said that the labor market deterioration typically happens quickly and that keeping rates high does not make sense when you want things to stay where they are.

On the data front, a survey compiled by S&P Global showed that business activity in the Eurozone unexpectedly contracted sharply, while business activity in the US was steady in September.

Additional details of the flash US PMI showed that average prices charged for goods and services rose at the fastest pace in six months, pointing to an acceleration in inflation in the coming months.

This comes on top of the hypothesis that rate cuts implemented to stimulate the economy occasionally lead to rising prices and could benefit the commodity's status as a hedge against inflation.

Israeli airstrikes on Monday against what it said are Hezbollah weapons sites in southern and eastern Lebanon killed nearly 500 people, raising the risk of a wider conflict in the Middle East.

This, along with the US political uncertainty and a bleak global economic outlook, suggests that the path of least resistance for the safe-haven precious metal remains to the upside.

That said, a surprise rate cut by the People's Bank of China (PBOC) on Monday, along with a stopgap spending bill to fund the US government through December 20, cap gains for the XAU/USD.

Traders might also opt to move to the sidelines ahead of the release of the US Personal Consumption Expenditures (PCE) Price Index on Friday amid overbought conditions on the daily chart.

Technical Outlook: Gold price needs to consolidate before advancing the recent upward trend

From a technical perspective, the recent breakout and acceptance above the $2,600 mark could be seen as a fresh trigger for bullish traders. That said, the Relatively Strength Index (RSI) on the daily chart is holding above the 70 mark and warrants some caution. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for the next leg of a move-up.

Meanwhile, any corrective slide is likely to attract fresh buyers near the $2,600 mark, below which the Gold price could drop to the $2,560 horizontal zone. The next relevant support is pegged near the $2,535-2,530 resistance breakpoint ahead of the $2,500 psychological mark. A convincing break below the latter might shift the near-term bias in favor of bearish trades and pave the way for some meaningful downside.

Source: FXSTREET

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