Stocks Firm as US Avoids Shutdown, Yen Heads for 150

Bright Beginnings: European Stocks Climb

European stocks rose at the start of the week, month and quarter as the US government avoided a shutdown and data from China suggested a pick-up in manufacturing activity. Cooler inflation in the US and Europe is supporting pausing rate hikes but the long end of the yield curve is bubbling up again this morning after being tamed on Friday. German manufacturing survey at a measly 39.6 in September underscores the problems facing the EZ. US ISM manufacturing PMI data is due up later in the session, having contracted for 10 straight months. Stocks generally fell last month, with the S&P 500 down almost 5%, but the FTSE 100 managed to buck the trend on higher oil prices.

Inflation Finally Cooling?

US inflation is playing the part demanded by the market if the Fed is going to pause rate hikes. Data on Friday showed core PCE rose 0.1% in August and 3.9% annually. It was the first reading under 4% for two years. Revisions indicated that inflation was a bit higher in the preceding months, which suggests that it is coming down even quicker. Meanwhile inflation in the Euro area declined to its lowest since October 2021. All of which supports that the idea that the ECB and Fed are going to hold rates where they are for the time being. Bond yields cooled off on Friday after ripping last week, but we see them creeping higher up the path of least resistance again with the 10yr Treasury yield up to 4.631% this morning, just off the 16-year high of 4.684% scaled last week.

Congress Dodges Shutdown

Investors probably welcomed the fact the US Congress passed a compromise bill late Saturday avoiding a federal shutdown, ensuring funding until Nov 17th. Citi: “That makes it more likely that Fed officials proceed with a 25bp hike at the November 1st meeting.” Interesting – market pricing is roughly 30% for a hike, 70% for a pause. So much now depends on the NFP jobs data this week. In August payrolls rose more than expected, while wage growth cooled – the kind of soft-landing Goldilocks scenario the Fed likes to see. Nonfarm payrolls increased by 187,000 in August, while the counts for June and July were revised down. The unemployment rate was 3.8%, the highest since February 2022 as new workers arrived and failed to be absorbed. Average hourly earnings rose 0.2% month-on-month, and +4.3% from a year ago, slightly below forecasts.

China’s Comeback: Factory Activity Flourishes

Meanwhile data shows China’s factory activity expanded for the first time in six months. That was the official data – the Caixin manufacturing PMI, showed cooling in activity but still expansion. China and some other Asian markets are closed for holidays.

BoJ and Beyond: Surveys and Sentiments

BoJ moves incoming? Japan’s Tankan survey showed sentiment among the country’s biggest manufacturers rose to 9 in September, versus 5 last time. confidence among non-manufacturers rose to 27, the highest since December 1991. USDJPY is heading to 150 this morning, touching 149.8 after more unscheduled bond buying operations - ready to run the stops post 150 or hit a wall of BoJ intervention? The BoJ’s Summary of Opinions from its September meeting saw some members setting out conditions and possible timing for a future exit from ultra-loose policy.

Oil – WTI (Nov) firming up overnight a touch after pulling back sharply from the 1yr highs late last week

Gold – catching a falling knife – stochastics on the turn with RSI looking oversold?