Futures Flat As Traders Brace For First Rate Cut Since 2020

Futures are flat, erasing an earlier modest gain, ahead of a very busy week which will see the first Fed rate cut since March 2020. As of 7:45am, S&P futures were down fractionally, with small-caps outperforming following a trend from late last week as investors price in a 50bps rate cut on Wednesday. Nasdaq futures are down 0.3% as Semis lag and the Mag7 are mixed and AAPL slumps as much as 2.4% as noted analyst Ming-Chi Kuo notes that, based on his first weekend pre-order analysis, demand for the iPhone 16 Pro series is lower than expected. There was little reaction in markets to the second attempt to assassinate Donald Trump. Shares of Trump Media & Technology rose as much as 10% in premarket trading after the former president said he has “absolutely no intention of selling” his stake when a lockup expires this week. While JPM’s Andrew Tyler asks rhetorically this morning “let’s see if last week’s bid returns“, it does not look very likely since we just entered the worst 2 week calendar period for the year, and stocks enter a buyback blackout, plus there is no tech conference to spike the euphoric AI narrative yet again. Bond yields are down as the curve bull steepens, pressuring the USD which slides for the 4th day in a row to its lowest level in more than eight months. The move was driven by strength in the yen, which touched the highest since July 2023 amid speculation this week’s slew of central bank decisions will lead to a narrowing interest rate differential between the US and Japan. Commodities are higher with Energy and Metals boosting the index. Today is a light macro day ahead of tomorrow’s Retail Sales and Weds’ Fed Mtg where the market remains split on 25 o5 50bps.

In premarket trading, Apple shares fall 2.2% as TF International analyst Ming-Chi Kuo notes that demand for the iPhone 16 Pro series is lower than expected, based on his pre-order analysis of the first weekend. Intel rose 1% as the chipmaker officially qualified for as much as $3.5 billion in federal grants to make semiconductors for the Pentagon, according to people familiar with the matter. Here are some other notable premarket movers:

• Colgate-Palmolive (CL) shares drop 1.5% after Wells Fargo downgraded the stock to underweight from equal-weight, saying the household and personal care products company’s growth is set to normalize.
• Exact Sciences (EXAS) shares rise 11% after the diagnostics company released performance data from a study of its blood-based colon cancer screening test candidate.
• Nuvalent (NUVL) shares jump 16% after the drug developer presented updated data from two early-stage trials of its lead cancer programs that impressed Wall Street.
• Stratasys (SSYS) shares rise 6.0% after the three-dimensional printer maker’s board authorized a $50 million share repurchase program. The new repurchase program represents 10% of the company’s current market value, data compiled by Bloomberg show.
• Trump Media (DJT US) rises 1.3%, with the stock set to extend Friday’s gains, after Donald Trump said he has “absolutely no intention of selling” his stake when a lockup period expires later this week.

Stocks have not reacted to the biggest news of the weekend, a second assassination attempt on Donald Trump, who is safe after his Secret Service detail opened fire at a man who was wielding an AK47 assault rifle at his West Palm Beach, Florida, golf course Sunday, in what the FBI called an apparent (second) assassination attempt. According to law enforcement officials, Secret Service officers clearing the golf course ahead of Trump spotted a man in the woods with a gun. The suspect — later identified as radical left-wing nutjob 58-year-old Ryan Routh who had previously fought in Ukraine against Russia — fled in a black car but was later detained after a chase.

The start of a long-anticipated US easing cycle takes center stage this week, part of a 36-hour monetary roller coaster that includes policy decisions in Brazil, South Africa the UK and Japan. It’s come down to a virtual coin toss for traders on whether the Fed will go for a 25 or 50 basis-point cut.

“There has rarely been so much uncertainty over central bank intentions,” analysts at Edmond de Rothschild wrote in a note. “They are caught between signs of economic weakness and inflation which is stubbornly resisting a return to the 2% target.”

For Joyce Chang, chair of global research at JPMorgan, the Fed has scope to make the bigger move and doing more now would probably send the right signal. “We are still sticking with a 50 basis-point call, but it is a debate, internally and within the broader market,” Chang said on Bloomberg TV. “When I talk to investors, 25 versus 50 isn’t so much the debate, but really how does the US growth story look.” That view was echoed by several other top Wall Street strategists, who suggested that the health of the US economy could have more bearing on stocks than the size of the Fed’s rate cut. The flipside, of course, is that a rate cut now with home prices once again rising, will spark another episode of runaway inflation, something which gold at a record $2580 is clearly anticipating.

“If the labor data weaken from here, markets can trade with a risk-off tone regardless of whether the Fed’s first move is 25 or 50 basis points,” Morgan Stanley’s Mike Wilson wrote in a note. On the other hand, if jobs were to strengthen, a series of 25 basis-point reductions into mid-2025 could prop up equity valuations further, he said. Goldman Sachs and JPMorgan analysts also warned that rates alone were less important for stocks, given the uncertain outlook for the economy.

The Bank of Japan, meanwhile, is expected to keep rates on hold after roiling global financial markets with an increase at its last meeting. “The communication from the BOJ will be critical to let market participants know exactly, as clear as they can be, what the next move and the particular timings of the next moves will be,” Katrina Ell, director of economic research Moody’s Analytics, told Bloomberg Television.  

European stocks are little changed as mining shares provide a drag after data showed China’s economy lost momentum in August. Among single stocks Rexel and Ipsen are the biggest gainers, while the biggest Polish insurer PZU plunged as heavy flooding hit the country’s southwest region. Here are the biggest movers Monday:

• Rexel shares surge as much as 14%, their steepest gain in four years, after the French electrical equipment group said it rejected an unsolicited takeover offer from QXO Inc. because it “significantly” undervalued the company
• Ipsen advances as much as 5.8% following an upgrade to outperform from sector perform at RBC, based on a higher peak sales estimate for the French drugmaker’s Iqirvo for primary biliary cholangitis
• Saipem shares jump as much as 6.1%, the most intraday since March, after the Italian drilling company won an offshore contract with QatarEnergy LNG worth about $4 billion
• Icade gains as much as 6.9% to the highest in more than three months, after Citi double-upgraded to buy and set a Street-high target, saying the commercial property investor’s dividend yield of about 20% is “hard to ignore”
• Crayon jumps as much as 18%, the most since August 2020, after Bloomberg reported Swiss technology firm SoftwareOne is exploring a potential combination of the two firms as it considers strategic options
• Intermonte Partners SIM jumped as much as 20% in Milan after asset manager Banca Generali made a takeover bid on Monday at €3.04 per share, with the aim of delisting it
• TI Fluid Systems shares rise as much as 17% after the auto supplier rejected a second takeover proposal from ABC Technologies, arguing the bid “significantly undervalued” the business. Analysts at Jefferies agree the valuation is too low
• TT Electronics shares plunge as much as 37%, the most on record, after the electronics company warned revenue will be lower than previously expected in the second half because of “weak” trading at two of its North American sites, which will also hurt profitability
• PZU insurer drops 13% as heavy flooding hits southwest Poland

Earlier, Asian equities climbed for a third day, bolstered by expectations of a rate cut by the US Fed this week. The MSCI Asia Pacific Index climbed 0.5%, with Hong Kong-listed tech stocks, including Tencent and Meituan, along with Australian lenders featuring among top gainers. Japan, Korea and China markets were closed for a holiday. In China, data published over the weekend showed industrial output recording its longest slowing streak since 2021, while consumption and investment were weaker than expected. That has bolstered expectations of more stimulus from the PBOC before year-end, adding to tailwinds from an expected Fed rate cut that might bring in larger emerging market flows.

“Support from fiscal policy, which has lagged throughout 2024, could step up,” Wei He, an analyst with Gavekal Research wrote in a note. “The government will probably introduce some additional stimulus measures in coming months.” Still, those measures are unlikely to convince market participants that nominal growth prospects are improving, she said.

In FX, the Bloomberg Dollar Spot Index falls 0.4% to the lowest since January as traders added bets on a 50bps interest-rate cut by the Federal Reserve this week while expectations of a narrowing rate differential between the US and Japan boosted the yen. The Japanese yen and Norwegian krone are the best performers among the G-10 currencies, rising 0.7% each.

In rates, Treasuries extended their gains, with the yield on the policy-sensitive two-year note falling to the lowest since September 2022 and outperformed as markets see higher odds that Wednesday’s Fed decision will be a half-point rather than a quarter-point rate cut. Front-end yields are richer by more than 2bp, longer maturities by 1bp-2bp; the 10-year yield is around 3.64% outperforming bunds and gilts slightly; 2s10s spread is ~1bp steeper on the day at ~8bp. Swap contracts price in around 37bp of easing for the September meeting and around 75bp by November, anticipating that one of the next two moves will be a a half-point cut. Corporate new-issue volume stands to be heavy Monday as borrowers aim to complete offerings ahead of the Fed decision. IG dollar issuance slate includes a couple of deals so far; around $25b of supply is expected this week, concentrated on Monday and Tuesday ahead of Wednesday’s FOMC decision. This week’s Treasury coupon supply includes $13b 20-year bond reopening Tuesday and $17b 10-year TIPS reopening Thursday

In commodities, oil prices advance, with WTI rising 0.8% to near $69.20 after its first weekly gain in a month as a drop in Libyan exports was offset by China’s economic woes. Meanwhile hedge fund traders are net short the oil complex for the first time on record. Spot gold rises $9 to around $2,586/oz. Bitcoin falls over 1%. gold rose to a fresh record high as markets waited for the Fed easing.

Looking at today’s light calendar, the data includes only September Empire manufacturing at 8:30am; this week we get retail sales, industrial production, housing starts and existing home sales. Fed speakers are in self-imposed quiet period until the Sept. 18 policy decision

Market Snapshot

• S&P 500 futures little changed at 5,633.50
• STOXX Europe 600 little changed at 515.95
• MXAP up 0.5% to 183.99
• MXAPJ up 0.5% to 571.56
• Nikkei down 0.7% to 36,581.76
• Topix down 0.8% to 2,571.14
• Hang Seng Index up 0.3% to 17,422.12
• Shanghai Composite down 0.5% to 2,704.09
• Sensex up 0.2% to 83,022.63
• Australia S&P/ASX 200 up 0.3% to 8,121.60
• Kospi up 0.1% to 2,575.41
• German 10Y yield little changed at 2.14%
• Euro up 0.4% to $1.1120
• Brent Futures up 0.7% to $72.12/bbl
• Gold spot up 0.4% to $2,587.72
• US Dollar Index down 0.43% to 100.68

Top Overnight News

• President Donald Trump survived a second assassination attempt on his golf course in West Palm Beach and the Secret Service opened fire at a suspected person with a weapon while Trump was golfing, according to law enforcement sources cited by AP. Trump’s campaign said the former President is safe following a shooting in his vicinity, while Trump said he will never give up and nothing will stop him. Furthermore, the FBI said it is investigating what appears to be an assassination attempt and a Palm Beach law enforcement official said the suspect was arrested and that they found an AK-47 type weapon.
• China economic data continues to fall short of expectations, with retail sales coming in +2.1% (down from +2.7% in Jul and below the Street’s +2.5% forecast) and industrial production at +4.5% (down from +5.1% in Jul and below the Street’s +4.7% forecast) while home price deflation worsens and time runs out for the gov’t to achieve its full-year targets. SCMP
• Major American retailers including Amazon and Walmart have been quietly exploring shifting toward a business model that would ship more goods directly to consumers from Chinese factories and require fewer U.S. workers in retail stores and logistics centers. NYT
• The US and UK are increasingly concerned Russia is giving Iran information and technology that may help it to build nuclear weapons, Western officials familiar said. Iran said it’s ready to enter talks under the framework of the 2015 nuclear deal, which Trump scrapped as president. BBG
• Bank of Canada governor Tiff Macklem has opened the door to accelerating the pace of interest rate cuts, signaling policymakers could switch to jumbo 50 basis point moves should growth disappoint. FT
• The Fed should cut by 50bp this week according to Greg Ip in the WSJ given cooling inflation (which is causing monetary policy to passively tighten) and rising employment risks. Ip said the Fed’s rate decision this week looks more difficult than it should be and the real question isn’t how much to cut, but where rates ought to be, while it added that the answer is much lower which argues for a half-point cut: WSJ
• DirecTV and Dish are in talks to merge, a combination that would create the largest pay-TV operator in the country (the firms hope regulators will be more amenable to a transaction this time around given shifting industry dynamics). BBG
• OpenAI could close a fundraising round at a valuation of $150B within weeks (demand has been strong), although the specific mechanism will be a convert, and the valuation could adjust lower if the firm is unsuccessful in altering its corporate structure to remove a cap on profits. RTRS

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mixed amid the holiday-thinned conditions with many key markets in the region closed and as participants braced for this week’s central bank announcements including from the FOMC, BoE and BoJ. ASX 200 mildly gained as real estate and financials led the advances across most sectors aside from defensives. Hang Seng was dragged lower amid the absence of mainland participants and with underperformance seen in property developers after Chinese house prices further deteriorated, while the latest Chinese Industrial Production and Retail Sales also disappointed.

Top Asian news

• China is strongly dissatisfied with and firmly opposes the US locking in tariff hikes on Chinese imports. Furthermore, China urges the US to immediately correct its ‘wrongdoings’ and lift all tariffs imposed on Chinese goods, while China will take necessary measures to firmly safeguard the interests of Chinese firms, according to MOFCOM.
• China Stats Bureau spokesperson said China will step up macro policy adjustments, while they expect a mild rebound in the consumer price index and for quickening bond issuance and policy initiatives to support China’s investment growth.

European bourses, Stoxx 600 (U/C) began the session almost entirely in the red, albeit modestly so. As the morning progressed, sentiment gradually improved and now displays more of a mixed picture. European sectors hold a negative bias; Retail takes the top spot alongside Consumer Products whilst Basic Resources lags, largely a factor of the poor Chinese data over the weekend. US Equity Futures (ES +0.1%, NQ U/C, RTY +0.1%) are indicative of a flat/slightly firmer open, ahead of the FOMC Policy Announcement on Wednesday. Intel (+3.5%) gains after the Co. reached a deal to make chips for the US military; a deal worth as much as USD 3.5bln.

Top European news

• ECB’s de Guindos says ECB projections show that inflation by 2025-end will hover around 2% target. Inflation in services is still resisting, this remains the ECB’s main concern. ECB expects a significant slowdown in growth of labour costs next year. ECB wants to keep all options open when it comes to interest rate decisions. The ECB’s balance sheet is expected to decrease by around EUR 40bln per month.
• ECB’s Kazimir says the ECB will almost surely have to wait until December for the next rate cut; it would take a significant shift in outlook for ECB to cut in October; very little new info in the pipeline before October meeting. There is no rush to cut rates, safest to wait for the outlook to become clearer.
• UK Chancellor Reeves was advised by a group of leading economists that cutting public investment in the UK would damage the foundations of the economy, according to FT.

FX

• DXY has extended the slump seen since last Thursday with the dovish Fed repricing the main catalyst. Markets now assign a circa 59% chance of a 50bps reduction this week compared to 15% post-CPI last week. The next target for DXY comes via the YTD trough at 100.51.
• EUR/USD is back above 1.11 thanks to the softer USD. EUR/USD is now eyeing the post-payrolls peak from September 6th at 1.1155 with the YTD high at 1.1201.
• GBP is firmer vs. the USD but flat against the EUR heading into the BoE on Thursday. Expectations are for an unchanged rate with a 7-2 vote split (dovish dissent expected from Dhingra and most likely Ramsden). Attention for Cable is on a test of 1.32; not breached since 6th September.
• JPY is the best performer across the majors as further dovish Fed repricing stands in contrast to a hawkish BoJ. USD/JPY has slipped below 140 for the first time since July 2023.
• Both antipodes are firmer vs. the USD and able to overlook the soft Chinese trade data overnight. AUD/USD has been able to undo much of the downside seen late last week with the current session high of 0.6736.
• CAD is a touch firmer vs. the USD but less so than peers following an interview in the FT with BoC Governor Macklem who signalled that the Bank could increase the size of rate cuts from 25bps to 50bps on account of softening labour market data and weakening crude prices.
• CNH is marginally firmer vs. the USD as the broadly softer dollar overshadows the negative follow-through from further soft Chinese metrics over the weekend.
• Bank of Canada Governor Macklem opened the door to increasing the pace of rate cuts as growth fears mount, according to FT.

Fixed Income

• USTs are relatively contained as markets count down to this week’s FOMC policy announcement, as it stands market pricing has the odds of a 50bps cut at around 60% and a 25bps move at 40%. Despite the shift in pricing, USTs themselves are essentially unchanged at 115-15 in a thin five tick range.
• Bunds are incrementally firmer and towards the midpoint of 134.71-97 parameters. Holding within Friday’s 134.62-135.19 range. The main focus point for the bloc is a speech from ECB’s Lane at 13:00BST / 08:00 EDT, a text is expected.
• Gilts are also slightly higher and holding around 20 ticks above the 101.00 mark and just off a 101.30 session peak. For the UK, the week’s focus point is the BoE on Thursday (exp. to hold, 7-2 split possible).

Commodities

• Crude is modestly firmer intraday amid the softer Dollar but despite the downbeat Chinese data over the weekend which reinforced the theme of an ailing Chinese economy following the Chinese inflation and trade balance figures in the week prior. Brent November trades within 71.52-72.39/bbl.
• Precious metals are firmer across the board amid the softer Dollar and with added optimism for precious metals as spot gold continues printing fresh all-time highs, with today’s parameter between USD 2,577.59-2,589.72/oz.
• Mixed trade across base metals with copper on a softer footing following the sub-par Chinese data. 3M LME copper resides in the middle of a 9,219.50-9,291.50/t range.
• UBS cuts Q4 2024 Brent price forecast to USD 75/bbl from USD 83/bbl; Cuts 2024 Brent forecast by USD 4/bbl to USD 80/bbl
• Almost a fifth of US Gulf of Mexico crude oil production remained offline and nearly 28% of natural gas production was shut-in in the aftermath of Francine on Sunday, according to the US offshore energy regulator cited by Reuters.
• BP (BP/ LN) is restarting operations at its Castrol lubricants facility in Port Allen, Louisiana after determining conditions are safe to return and Shell (SHEL LN) is ramping up production at Perdido following the resolution of downstream issues, according to Reuters.
• Chevron (CVX) said its US Gulf of Mexico Jack/St Malo and Big Foot platforms are producing at reduced rates due to onshore gas plant disruption, while it continues to return workers and restore oil production at the US Gulf of Mexico Anchor and Tahiti platforms shut-in by Francine with initial assessments showed that neither the Anchor nor Tahiti platforms suffered significant damage, according to Reuters.
• ANZ expects gold to reach USD 2,900/oz by end of 2025 (current spot price USD 2,587.50/oz).

Geopolitics: Middle East

• Sirens sounded in Avivim in the Upper Galilee to warn of rocket launches, according to Al Jazeera.
• Yemen’s Houthis claimed responsibility for a missile attack on central Israel and stated that a Yemeni missile reached Israel after 20 missiles failed to intercept it. There were separate reports that Israel’s military announced sirens were set off by a missile which crossed into the country from the east and fell in an open area but caused no casualties.
• Israeli PM Netanyahu said Yemen’s Houthis should know that they will exact a heavy price for every attempt to harm Israel and noted that a missile fired from Yemen most likely fragmented in mid-air, while he also said the current situation in northern Israel will not continue.
• Houthis said they downed a US drone over Dhamar

Geopolitics: Other

• Russia’s Medvedev said Russia already has formal grounds to use nuclear weapons but has so far chosen not to do so, while their patience has its limits and their response might come in non-nuclear form.
• Russia’s Deputy Foreign Minister said Moscow is aware that the West decided on whether to allow Ukraine to strike deep within Russia and that Moscow should use other means since verbal warnings to the West against escalation are not working, according to TASS.
• G7 Foreign Ministers condemned in the strongest terms Iran’s export and Russia’s procurement of Iranian ballistic missiles, while they called for Iran to immediately cease all support to Russia’s illegal war against Ukraine and halt such transfers of ballistic missiles, according to Reuters.
• Ukrainian President Zelensky said Ukraine brought home 103 POWs from Russia in a second swap in two days and noted the incursion into Kursk helped bring about a prisoner exchange with Russia.
• Ukrainian spy chief Budanov said North Korea’s artillery supplies to Russia are a major problem and have a visible battlefield impact. Budanov said that Russia has ramped up production of Iskander ballistic missiles and guided bombs, as well as commented that Russia expects to face recruitment problems in the summer of 2025.
• US National Security Adviser Sullivan said long-range weapons permission is the subject of intense consultations among allies and that fighting around Ukraine’s Pokrovsk is of unique concern, while the US is preparing to present a substantial Ukraine aid package this month.
• US military member was detained in Venezuela and it was also reported that two additional US citizens were detained, according to a State Department spokesperson cited by Reuters.
• Russian and Chinese warships practiced missile and artillery firing in the Sea of Japan as part of Ocean-2024 drills, according to RIA.
• China’s military said the transit of two German warships in the Taiwan Strait increased security risks and sent a wrong signal. China’s military also stated that Chinese troops are always on high alert and ready to counter all threats and provocations.
• China’s Coast Guard said Philippine vessel 9701 withdrew from the Sabina Shoal on September 14th which ‘illegally’ stayed there for nearly five months, while it added that China took measures against the Philippine vessel in accordance with the law and the Philippines’ repeated attempts to organise supple replenishment to the vessel had all failed. However, the Philippines said it would send another vessel to immediately takeover from the vessel in the disputed Spratlys.

US Event Calendar

• 08:30: Sept. Empire Manufacturing, est. -4.0, prior -4.7

DB’s Jim Reid concludes the overnight wrap

This time last week we suggested that if we were going to get 50bps from the Fed on Wednesday we probably needed a media leak as we approached or entered this past weekend. Thursday’s WSJ and FT articles certainly weren’t smoking guns towards 50bps but they suggested the prospect was higher than where it was after Wednesday’s slightly firmer CPI report. It’s hard to know how informed the WSJ article was but as you will remember, the same author (Nick Timiraos) wrote a much firmer endorsement of a surprise 75bps hike just before the June 2022 FOMC which completely moved the needle at the time. There was little doubt that this was well informed. As you’ll see from my CoTD on Friday, our economists and strategists put both WSJ articles (2022 vs 2024) from this same author into our proprietary AI tool (it’s not called ChatDBT but I’ll refer to it that way) and it told us that “the June 2022 article conveys a strong sense of urgency and conviction regarding the need for a significant rate hike to combat inflation. The September 2024 article, while discussing the possibility of a rate cut, presents a more balanced and less decisive outlook, reflecting the Fed’s cautious approach in navigating economic uncertainty”. So it confirmed our prior about the fresh WSJ article that although this could be a signal that things were closer than we thought, there is no slam dunk here. We feel this is a good use case for AI as we all have our biases and its nice to see what the unbiased linguistic analysis suggests. I’ll be typing everything my wife tells me into this now to ensure I get the true meaning not what my biases interpreted.

Back to the Fed, in the absence of any weekend articles that could have been sourced to the Fed, it really leaves the decision on Wednesday on a knife-edge, something that hasn’t often been the case by the time we ultimately arrived at each FOMC in recent years. Normally its been fairly obvious that close to the meeting or the Fed have found a way of guiding the market to the eventual outcome. At the moment DB is expecting 25bps but with market pricing where it is (41bps priced in and up 3-4bps overnight), and if no Fed leaks push us back towards 25bps over the course of the next 12-24 hours, our economists could easily move to a 50bps today as they don’t think the Fed will want to surprise the market too much on the day. We will see. As important as the 25 vs 50 debate will be the communication from the Fed. Would a 50bps be the start of 50s or a one off larger move to start the cycle? Would a 25bps mean the bar for subsequent 50s is high? There will be lots to digest.

It will be difficult to deviate the messaging too far away from the latest updated Summary of Economic Projections (SEP) and dot plots though. So in many ways that constrains the messaging unless we see large changes. Our economists think the Fed’s growth forecasts are likely to be little changed but the median core PCE inflation forecast could fall by a tenth or two. They believe the unemployment rate forecast will move higher this year – likely into the 4.3-4.4% range – but be mostly unchanged in subsequent years. If the Fed cuts by 25bps on Wednesday, they would expect a median of 75bps of cuts this year and if they cut by 50bps, they would expect the SEP to reflect 100bps of cuts through year-end.

Outside of the Fed the main highlights are tomorrow’s US retail sales and industrial production, Wednesday’s US housing starts and permits and UK inflation, Thursday’s Bank of England decision (DB expect unchanged, see preview here), US existing home sales and initial jobless claims, and Friday sees the BoJ meeting (DB preview here, view is for unchanged), China decide on 1 and 5-yr prime rates, Japan’s CPI, and German PPI.

Over the weekend, China’s latest monthly data dump was weaker than expected across the board. Industrial Production (4.5% vs. 4.7% expected), Retail Sales (2.1% vs. 2.5% expected), the Jobless rate (5.3% vs. 5.2% expected) and Fixed Asset Investment (3.4% vs. 3.5% expected) were all soft alongside slightly lower than expected new and used home prices. Our economists have downgraded their GDP forecasts and believe YoY growth likely slipped to 3.7% in August from 4.6% in July.
We can’t see the immediate market response as mainland Chinese markets (and South Korean) are closed until Wednesday with markets in Japan also closed today for a holiday. The Hang Seng opened -0.76% lower but has rallied back to -0.29% as I type. US equity futures are fairly flat and Treasuries aren’t trading due to the Japanese holiday.

Another big story to break last night was what the FBI are calling a second assassination attempt on former President Donald Trump at his Florida golf course. This may steer the campaign in a different direction again over the next few days.

Recapping last week now, markets put in a very strong performance, with risk assets recovering the bulk of their losses from the previous week. Initially, that was driven by growing optimism about the economic outlook, with fears diminishing about a potential downturn in the US. Then by the end of the week, markets got a further boost as the prospect of a 50bp Fed rate cut this month came back into view, which provided a fresh uplift for equities and bonds. In many respects, it was the best of both worlds from a near-term market perspective, as the perceived likelihood of a 50bp rate cut went up, but unlike in early August, it wasn’t because of negative data surprises.

For equities, this was a very good combination, and the S&P 500 advanced every day last week to gain +4.02% (+0.54% Friday), leaving the index less than 1% beneath its all-time high from mid-July. Tech stocks helped to drive the gains, and the NASDAQ advanced +5.95% (+0.65% Friday). For both indices, this was their best weekly performance of 2024 so far. There were more modest equity gains around the world, with Europe’s STOXX 600 up +1.85% (+0.76% Friday), and Japan’s Nikkei up +0.52% (-0.68% Friday). However, Chinese equities underperformed, and the CSI 300 fell -2.23% last week (-0.42% Friday) to close at its lowest level since January 2019.

The growing prospect of a 50bp rate cut, which was 49% priced by the end of the week, was also very good for sovereign bonds. For instance, the 2yr Treasury yield was down another -6.5bps last week (-5.8bps Friday) to 3.58%, whilst the 10yr yield was down -5.7bps (-2.2bps Friday) to 3.65%, its lowest weekly close since May 2023. Illustrating a more dovish market perception of the Fed’s reaction function, the decline was even more noticeable for real yields, and the US 10yr real yield fell -10.3bps last week (-4.0bps Friday) to 1.57%. Meanwhile in Europe, sovereign bond yields fell slightly last week, with the 10yr bund yield down -2.3bps (-0.2bps Friday) to 2.15%.

Finally, it was an eventful week for oil prices, with Brent crude closing beneath $70/bbl on Tuesday for the first time since December 2021. But over the week as a whole, it was actually up by +0.77% (-0.50% Friday) to close at $71.61/bbl. Those gains were echoed across other commodities, and gold prices closed at an all-time high in nominal terms of $2,578/oz, having risen by +3.21% over the week (+1.06% Friday).