The US presidential debate (Tue), US CPI (Wed), US PPI (Thu), and potential ECB cut (Thu) will garner market interest this week. Later today Apple launches its iPhone 16 along with other tech. China trade data kick starts Tuesday, and later we have Germany CPI and UK unemployment prints. US CPI takes centre stage on Wednesday given it is the last inflation figure before the Fed’s next meeting. Currently, markets expect headline CPI to have eased to 2.6% yoy, with the core reading stagnant at 3.2% yoy. US PPI follows on Thursday. Markets will monitor PPI components such as airfares and financial services components which feed into the Fed’s preferred inflation gauge, the PCE deflator. The week ends with the preliminary Uni. of Michigan consumer sentiment prints for September.
Last week’s broader risk-off sentiment supported bonds amid generally softer data from the US. The yield on the 10-year UST rallied 19bps to 3.71% by Friday’s close. The S&P Index suffered a 4.25% loss driven by slowdown fears. The DXY Index fell 0.51%. Meanwhile, Brent slipped 9.82% to $71.02pb amid demand concerns.
The US ISM manufacturing reading remained in contraction, and fell below expectations in August. However, this was stronger than the July print. Next JOLTS job openings and the ADP employment change both disappointed. Then Friday’s non farm payrolls indicated a more pronounced slowdown in the labour market than expected. Job gains reached only +142K, considerably lower than the market forecast of +165. Additionally, previous reports were revised downwards, with last month’s already weak figure of +114k adjusted even further to a mere +89k. On the other hand, the unemployment rate fell to 4.2%, in line with market expectations, and average hourly earnings ticked up to 3.8% yoy. While the disappointing job growth in isolation might suggest a 50bp cut, the steady unemployment rate coupled with still strong wage growth could prompt the Fed to opt for a more modest 25bp reduction. It presents a challenging balancing act for the central bank, weighing the recent weakening jobs data against the upside inflation pressures.
A downbeat August Fed Beige Book noted that while “employment levels were generally flat to up slightly in recent weeks,” it also stated that “employers were more selective with their hires and less likely to expand their workforces” due to heightened concerns over demand and the economic outlook. The report also noted that “manufacturing activity declined in most districts”. We also heard from several Fed members including Goolsbee who stated: “it is pretty clear that the path is not just rate cuts soon” but multiple cuts over the next 12 months. On Friday, Williams stated that “it is now appropriate to dial down the degree of restrictiveness” amid a more evenly balanced economy. Over the weekend, US Treasury Secretary Yellen maintained that while there are risks, recent cooling in the labour market is a signal of a soft landing, not a recession. Elsewhere, China’s PPI and CPI disappointed this morning, reading -1.8% yoy, and +0.6% yoy in August, respectively. The marginal tick-up in CPI was due to higher food costs resulting from weather disruptions, rather than a pick-up in domestic demand. Over the weekend, the nation’s FX reserves topped USD 3.28tn. Meanwhile, the domestic real estate market faces uncertainty as current easing measures are deemed inadequate, with speculation about potential government intervention or local inaction. Financial markets reflect this uncertainty, with government bond yields dropping and discussions about monetary policy adjustments evident. The People’s Bank of China (PBoC) has indicated room for reserve requirement ratio (RRR) cuts and emphasised data-dependent interest rate decisions. Markets will look for any stimulus indications from policy makers at China’s People’s Congress committee meetings. The One Belt and Road initiative summit will also be of interest this week.
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