Fed taps into relaxing week, China’s economy weak By Reuters

A look at the day ahead in US and global markets from Mike Dolan

After 30 months of extraordinary monetary tightening aimed at eliminating a post-pandemic inflation surge, the Federal Reserve is finally set to cut interest rates this week — and now it’s just a matter of how much.

With another set of weak industrial and retail readings from China on Saturday and the FBI on Sunday looking into a second failed assassination attempt on Republican presidential candidate Donald Trump, the news backdrop for this week’s long-awaited Fed easing is choppy to say the least.

But investors remain focused for now on growing speculation that the Fed’s first rate cut on Wednesday will be 50 basis points, rather than 25 basis points – not least because some see last week’s press reports as a possible direction , even as Fed officials stick to the traditional earlier meeting. the quiet period.

Global markets were relatively calm early on Monday, largely because centers in Japan and mainland China were closed for holidays.

However, the buoyancy seen late last week — which brought Wall Street’s stock benchmarks back to within 1 percent of record highs — appears to be sustained early Monday. Stock futures were higher, with small caps leading the way.

Fed futures fell about 40 bps on Wednesday – a more than 60% chance it will be 50 basis points instead of 25 basis points. Just as significantly, they are penciling in 120 bps of cuts through the end of the year.

And with short-term Treasury yields returning to 2022 levels, the greenback is taking much of the heat early on.

Two-year Treasury yields fell below 3.55% for the first time in two years, pushing the spread of the 2- to 10-year yield curve to its most positive since June 2022 at nearly 9 bps.

The dollar bore the brunt of Fed-centric trade, with the DXY index sharply lower and again tracking year-to-date lows. MSCI’s emerging market currency index gained nearly 0.25 percent to hit a record high.

The relative interest rate dominated among the majors. While the Bank of Japan still maintains the likelihood of higher rates in the future, the Japanese yen strengthened to 140 per dollar for the first time since July 2022.

And with markets assuming the Bank of England will hold back on a second interest rate cut of the year when it meets on Thursday – partly in anticipation of the first budget next month from Britain’s new Labor government – and sterling rose from new.

CHINA Weakness

It was more difficult to gauge the reaction to China’s latest analysis of understated economic readings over the weekend as mainland markets were closed on Monday.

China’s industrial output growth slowed to a five-month low in August, according to the latest figures, while retail sales and new home prices missed and weakened further – inevitably strengthening the case for the type of aggressive government stimulus that has so far been visible. absent.

The weak numbers made Beijing’s 5 percent growth target a more distant prospect and mirrored weak bank lending numbers seen on Friday.

Perhaps most alarming of all is the ongoing property collapse that the authorities have failed to do. And China’s new home prices fell at their fastest pace in more than nine years in August – with only two of the 70 cities surveyed reporting both monthly and annual home price increases in August.

However, Hong Kong rose on Monday and strengthened against a generally weaker dollar globally.

In politics, the race for the White House took another turn after the US Secret Service foiled what the FBI called an apparent assassination attempt on Trump while he was playing golf on his West Palm Beach, Florida course.

Trump has trailed Democratic nominee Kamala Harris in the betting markets since last week’s TV debate between the two, and she remains the fringe favorite to win the presidency in November.

In Europe, stock markets were little changed.

But in bid news, France’s Rexel jumped 12.6 percent after the Paris-listed group rejected a $9.4 billion takeover bid from QXO led by billionaire Brad Jacobs on Sunday.

Key developments that should provide more direction for US markets later Monday:

* September New York Fed survey of manufacturing

* European Central Bank Chief Economist Philip Lane speaks

* US Treasury sells 3.6 month bills

(By Mike Dolan; Editing by Alex Richardson; [email protected])