Market Report.
📉 Yesterday, Fed Chair Powell did not announce any new policy changes in his speech, disappointing markets hoping for signals of larger rate cuts. Powell said the Fed is not in a hurry to cut rates further and projections show two more 25 basis point cuts if the economy performs as expected. This implies the Fed is not as dovish as markets had been pricing in, removing expectations for 50 basis point cuts in the near-term. Friday’s jobs report now takes on heightened importance, as a weak figure could put a larger cut back on the table in October or December.
🇩🇪 As we warned would happen, not only is Germany’s inflation falling, but so is its manufacturing activity. Europe’s PMIs released today, despite being better than expected in some cases, put Europe’s industrial activity in contraction. Particularly harsh are the data from Germany, whose manufacturing PMI stands at 40.6, extremely weak. The only two countries in the region with a positive manufacturing PMI are Spain and the UK. In this scenario, doubts about future ECB rate cuts dissipate. Europe needs to reduce its financial costs, rates will come down.
📉 China’s Caixin manufacturing PMI fell to 49.3, the lowest since July 2021, indicating contraction. Factory activity weakened across Asia in September as soft Chinese demand and global uncertainty weighed on exports. Japan’s manufacturing sector contracted last month while Taiwan’s expansion slowed, reflecting weak global demand. South Korea’s export growth decelerated in September with shipments to the US barely rising. India’s manufacturing growth also cooled to an 8-month low as new orders grew at the weakest pace since December. While the IMF expects a soft landing for Asia, moderating inflation may allow rate cuts to support growth.
🕊️ BOJ policymakers discussed the need to go slow on rate hikes due to jittery markets and uncertainty over the global outlook. Given overseas risks, raising rates further now could signal an unwarranted shift to tightening. In September the BOJ kept rates steady and said it could afford to watch global developments. New PM Ishiba, as we announced in reports last week, also supports maintaining accommodative policy, adding uncertainty.
Market View:
📊 Mini S&P 500 futures remain in the 5800 area, awaiting Friday’s employment report. The Nasdaq remains above 20,000 points, currently trading at 20,105.
💹 The dollar index DXY, which yesterday was losing its supports below 100.50 points, recovers today to 101 points, possibly motivated by Powell’s words that we have already discussed. The EUR/USD has retreated from 1.12 to 1.11. The US 2-year bond remains in the range of 3.65% to 3.50%.
📈 In Europe, the DAX 40 remains in the area of 19,400 points, almost at all-time highs. The Eurostoxx has retreated to the 5,000 point area.
💰 Bitcoin, after reaching $66,000 over the weekend and dropping to $63,000 yesterday, bounces today towards $64,000. Crude oil continues to weaken, with Brent falling to $70 a barrel in recent hours, despite the escalation of Israel’s war with the incursion into Lebanon early this morning. Gold, which fell back to $2,650/oz, bounces back up to $2,670/oz.
Geopolitics:
🌍 Bloomberg publishes today a very useful comparison of the differences in the vision of the economy between Trump and Harris. Trump promises permanent tax cuts, higher tariffs including on China and Mexico, and mass deportations of undocumented migrants. Harris proposes tax credits for families, banning grocery price gouging, capping drug costs, and clamping down on border crossings. Recalling that the migration crisis and food inflation are happening with Kamala Harris in government as Vice President. Trump claimed to her during the last debate that if she has a plan for these crises, it is time to implement it, since she is still in office. US debt is set to rise under either leader, estimated at 116% of GDP by 2028 under Trump and 109% under Harris. It is important to note that the protectionism initiated by Trump has been continued and implemented by Biden. There is bipartisan alignment emerging on economic nationalism, tariffs, deficits and blocking foreign takeovers of US businesses.
🛡️ Israel has begun limited ground raids against Hezbollah targets in southern Lebanon, calling the operation Northern Arrows. Air force and artillery are supporting ground forces with “precise strikes” against villages posing an “immediate threat.” Biden and the UN have opposed an Israeli ground invasion but Israel has rejected calls for a ceasefire, but based on Politico, according to American and Israeli sources, senior White House officials secretly advised Israel that the United States would back its choice to increase military pressure on Hezbollah, even though the Biden administration had just publicly encouraged the Israeli government to scale back its operations.
💸 The US has, in the last few days, approved more than $8 billion in funds to militarily support Israel, more than $7 billion to militarily support Ukraine and has announced a new package of more than half a billion in arms for Taiwan.
