Futures are higher in a modest relief rally following the worst weekly loss of the year, triggered by cooling US jobs data that left economists and traders at odds as to how aggressively the Federal Reserve will cut interest rates. As of 8:00am ET S&P futures are 0.7% higher while Nasdaq futurs gained 0.8% after the underlying index ended last week with its steepest decline since November: both Mag7 and Semis higher in the premarket along with new index additions. Bond reversed some of their recent gains, with the 10-year Treasury yield jumping four basis points, the first increase in five days, aiding gains in the USD. Commodities are mixed with Energy higher and Ags/Metals lower but with soft patches of strength in base/softs. As JPM's market intel desk writes, we enter a week with several major questions to answer and additional macro data points: near-term or deadcat bounce? 25 or 50bps? Who leads the election? Is AI dead?
In premarket trading, Boeing rose 4.6% on optimism that a labor deal with its largest union will help the troubled US aircraft manufacturer avoid a potentially crippling strike at its Seattle-area factories. Palantir Technologies jumped 8.5% and Dell gained 5.5% following news that the companies will join the S&P 500. Here are some more premarket movers:
September has so far been true to its painful reputation, and has seen both stocks and commodities slide amid concern about waning global growth. the VIX remains elevated after closing at its highest in a month on Friday. Some analysts are encouraging investors to take advantage of opportunities to position defensively with volatility poised to persist amid concerns over growth and the reaction by policymakers.
“If any investor in the market right now is not expecting volatility they are missing an opportunity to add quality to their portfolio,” Joe Quinlan, head of CIO Market Strategy for Merrill and Bank of America Private Bank, said in an interview with Bloomberg TV.
Meanwhile, attention remains glued to the Fed as it nears its September FOMC decision: the choice facing Fed officials — whether to start easing gradually with a 25bps cut or to front-load rate cuts, by going 50bps — is bound to be contentious. With recession fears also resurfacing, investors are scrutinizing economic data for clues on the likely rate path. Wednesday’s US consumer-inflation numbers are next on the radar. US data Friday showing weaker payrolls growth reinforced the view that the labor market is cooling and sent stocks reeling. Traders reacted by increasing bets on a 50 basis-point Fed cut this month, even though Goldman said the jobs report wasn't bad enough to justify a rate cut of that magnitude.
Others like JPM and Lombard Odier disagree with Goldman, and see a 50bps cut as justified: “We are leaning towards a 50 basis point cut, front-loading in September,” Nannette Hechler-Fayd’herbe, chief investment officer for EMEA at Bank Lombard Odier, said in an interview with Bloomberg TV. “I don’t think they have much to lose to actually making a bigger cut in September with 50 basis points. It’s a great possibility for them to initiate an insurance against whatever softer data are coming.”
Tech also led a rebound in European stocks, rebounding after the worst week in 18 months, as trader attention turns to US inflation data and the European Central Bank rates decision later in the week. The Stoxx 600 gained 0.6% with consumer products declining the most, weighed down by Ubisoft after a downgrade at Cantor Fitzgerald and luxury firms Kering and Burberry after ratings cuts at Barclays. OCI gains after the firm agreed to sell its methanol business to Methanex in a deal worth over $2 billion. Here are the most notable movers:
Earlier in the session, Asian equities closed at their lowest level in over three weeks, as technology stocks slid on concerns over US economic growth. The MSCI Asia Pacific Index fell as much as 1.8%, before recouping some of the losses, with chipmakers Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. among the biggest drags. Japanese shares pared losses, with the Nikkei 225 Average closing 0.5% lower after plummeting more than 3% during the day, helped by a weakening yen. Taiwan’s key stock gauge fell 1.4%, while Hong Kong benchmarks were set for a fifth straight day of declines.
Weak US non-farm payrolls data Friday sparked concern that the Federal Reserve is moving too slowly to support the world’s largest economy. While investors try to gauge the size of the Fed’s rate cut next week, the Bank of Japan’s recent move to tighten policy has put upward pressure on the nation’s currency, fanning concerns over carry trades.
In FX, the Bloomberg Dollar Spot Index rose 0.3% and outperformed G-10 peers after republican nominee Donald Trump pledged a 100% tariff on goods from countries that shun the greenback. Dollar-yen rose 1% to 143.80, after a report showed Japan’s GDP expanded at an annualized pace of 2.9% in the second quarter, slightly lower than the preliminary estimate. Some leveraged funds which initiated short dollar-yen positions in anticipation of a stocks-fueled risk-off price movement have since exited, according to Asia-based FX traders; the pound drops to around $1.30. “The US labor market data provided mixed news for US rates and together with soft Japan GDP data, are seeing investors reduce their short USD/JPY positions,” said David Forrester, senior FX strategist at Credit Agricole CIB in Singapore.
In rates, treasuries are cheaper across the curve, paced by bunds as stock index futures erase some of Friday’s big losses. As traders continue to assess the likely size of Fed rate cuts, focus is chiefly on Wednesday’s August CPI data as policymakers are in a self-imposed quiet period until the Sept. 18 decision. Two-year Treasury yields rise 6bps to 3.7% as speculation swirls around the Fed’s interest-rate tightening while the 10-year is around 3.74% is ~3bp cheaper on the day; bunds in the sector are ~2bp wider vs US while gilts keep pace: European bond yields are higher after Mario Draghi’s report on EU competitiveness called for as much as €800 billion of new spending a year.
In commodities, WTI adds 1% to ~$68.34. Spot gold is steady at $2,496/oz. Most base metals rise; LME copper outperforms peers.
Looking at today's calendar, we get July wholesale inventories (10am), August New York Fed 1-year inflation expectations (11am) and July consumer credit (3pm). We also saw another disappointing print from China's CPI, PPI overnight. Oracle reports earnings.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks suffered firm losses as the region took its opportunity to react to last Friday's disappointing US jobs data, while participants also braced for this week's key events including the latest US CPI report. ASX 200 declined with the index pressured by underperformance in gold stocks and the top-weighted financials sector. Nikkei 225 gapped beneath the 36,000 level with sentiment not helped by disappointing Japanese Q2 GDP revisions. Hang Seng and Shanghai Comp conformed to the negative mood with the former dragged lower by notable weakness seen in the energy-related stocks after recent oil price pressures, while the mainland also reflected on softer-than-expected CPI data and sharper PPI deflation.
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European bourses, Stoxx 600 (+0.5%) began the session on a firmer footing and continued to edge higher as sentiment continued to improve as the session progressed. European sectors are entirely in the green; Tech is the best performer, propped up by gains in semi-conductor names, as they attempt to pare back some of the last week's hefty losses; ASML (+2.5%), BE Semi (+2%). Luxury is towards the foot of the pile, hampered by a double broker downgrade for Kering (-2.7%), with poor Chinese inflation metrics also not helping. US equity futures (ES +0.6, NQ +0.8%, RTY +0.3%) are entirely in the green, attempting to pare back some of the hefty losses seen in the prior session. Data docket for today is light, but Tech traders will be focused on Apple's iPhone event later today. Apple’s (AAPL) new iPhone will use Arm’s (ARM) next-gen chip technology for AI, according to FT. Boeing (BA) said it reached a tentative agreement with the International Association of Machinists and Aerospace Workers and district lodges for a 25% wage hike, according to Reuters. Elsewhere, Dalian Airlines Boeing (BA) 737 flight has suffered engine malfunction on Monday en route from Dalian to Beijing, safely returned to Dalian airport, according to Chinese State Media.
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Geopolitics: Middle East
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US Event Calendar
DB's Jim Reid concludes the overnight wrap
The week after payrolls is often quiet, but with the 25bps vs 50bps Fed debate for next week raging, there will be plenty of opportunity for volatility as the market flits between the two. With the Fed now in its media blackout period ahead of next Wednesday's almost certain first cut in the cycle, it looks to us that 25bps is just the more likely based on what the Fed have been telling us. However, given past form if they do decide 50bps is firmly on the table it is probably likely that well-informed press contacts will give us a steer. However, if that materialises it may be nearer to this time next week rather than the next few days. So 25 vs 50 will be the main market focus this week.
Wednesday's US CPI and Thursday's PPI will probably help move that debate on, but it seems employment is more important at the moment and Friday's mixed employment report had arguments for both sides, so the swing factor is probably how the committee view labour markets rather than inflation. Before we preview the inflation data and review Friday's employment report, the other two main global highlights are the US presidential election debate between Harris and Trump tomorrow night, and the ECB decision on Thursday, likely to be a 25bps cut (see DB's preview here). The election seems to have fallen down the pecking order of market topics since Harris replaced Biden as the Democratic candidate. However Trump has edged back in the lead on the betting odds now, and RealClearPolitics' average of various odds puts Trump at 51.5% as of this morning. This, the debate, and the fact that it’s now only 2 months to polling day means that this will soon become the most important topic again in markets alongside the Fed and any US recession fears.
In terms of more minor data and events this week, today sees the 1-yr NY Fed inflation expectations series and July US consumer credit. Tomorrow sees the NFIB small business optimism survey, the latest UK employment data, China trade, Italian IP and a 3yr UST auction. Outside of the aforementioned US CPI, Wednesday sees UK monthly GDP and a 10yr UST auction. Thursday will obviously see US jobless claims in addition to a 30yr UST auction. Friday sees the US University of Michigan consumer survey. See the rest of the week ahead in the day-by-day calendar at the end.
In terms of Wednesday's US CPI, DB is expecting headline (+0.20% forecast vs. +0.15% previously) and core (+0.23% vs. +0.17%) CPI to be around the same level. This is in line with consensus. This would equate to YoY headline CPI dropping 30bps to 2.6%, with core unchanged at 3.2%. As our economists point out, the three-month annualised rate would remain below 2% (1.9% vs. 1.6% in July) and with the six-month annualised rate falling by 20bps to 2.6%. A surprise increase in rents in July will mean this category again sees a lot of focus for August. Our economists think we'll return closer to June's tamer levels. Indeed they anticipate primary and owners’ equivalent rents to rise by 0.32% (vs +0.49% in July) and 0.30% (vs. +0.36% in July), respectively. As for PPI on Thursday, headline (+0.2% vs. +0.1%) and core (+0.2% vs. unch.) should post similar gains to their CPI counterparts. As always, we will pay closest attention to the categories that feed into the core PCE deflator – namely, health care services, airfares and portfolio management. Challenging base effects should cause the year-over-year growth rate of core PCE to tick up to 2.7%.
Overnight in Asia, the negative market momentum has continued, with sizeable losses across the major indices. In part, that’s because they’re reacting to the US payrolls number on Friday, but the data from Asia this morning has also been underwhelming. For instance, Japan’s GDP growth in Q2 was revised down on the latest reading to +0.7%, having previously been at +0.8% on the initial estimate. On top of that, China’s inflation was also weaker-than-expected in August, with CPI only up to +0.6% (vs. +0.7% expected), whilst the PPI reading fell further into deflationary territory at -1.8% (vs. -1.5% expected).
Against that backdrop, the Nikkei is down -1.23% this morning, putting the index on course for a 5th consecutive daily decline. Otherwise, the CSI 300 (-1.06%) and the Shanghai Comp (-0.92%) are both on track to close at their lowest level since February, and there’ve also been losses for the Hang Seng (-2.01%) and the KOSPI (-0.48%). That said, it does look as though the equity selloff has begun to stabilise elsewhere, as US equity futures are pointing higher this morning, with those on the S&P 500 (+0.38%) and the NASDAQ 100 (+0.54%) both advancing. US Treasury yields have also risen this morning, with the 10yr yield up +3.6bps to 3.74%, which comes as investors are modestly dialling back the probability of a 50bp rate cut next week, which now stands at 31%.
Looking back at that US jobs report on Friday, our economists published a chart book on it here with everything you could possibly want to know. But in brief, the positives were that payrolls rebounded in August (headline 142k vs. 89k in July, and private 118k vs 74k) and the unemployment rate (4.2% vs. 4.3%) retraced some of its prior rise with average hourly earnings (+0.4% vs. +0.2%) increasing alongside a one-tenth increase in the work week (34.3hrs vs. 34.2hrs). On the negative side, the previous couple of months saw payrolls revised meaningfully lower, and the 3m average of payrolls growth is now at the lowest since the early days of the pandemic.
Our economists continue to believe that most of the rise in unemployment from the cycle lows is due to an increasing supply of labour, so the story is so far about less labour demand rather than lay-offs. This was a point that both New York Fed President Williams and Fed Governor Waller made on Friday afternoon after the report. Neither speech provided a smoking gun for a 50bps hike and therefore we think on balance they'll start with 25bps next week.
In terms of market performance last week, markets saw a significant risk-off move, with the S&P 500 suffering its worst weekly performance since the week of SVB’s collapse in March 2023, with a -4.25% decline. The index lost ground every day of the week, ending the week with a further -1.73% loss after the jobs report. Those losses were even bigger for the NASDAQ, with the index falling -5.77% (-2.55% Friday), its worst decline since January 2022. So with just a week into the month so far, September is certainly living up to its reputation as a very bad one for equities. Globally it was much the same story, with Europe’s STOXX 600 down -3.52% (-1.07% Friday), Japan’s Nikkei down -5.84% (-0.72% Friday), and the MSCI EM Index down -2.28% (-0.11% Friday).
On the rates side, there were some very volatile moves after the jobs report, but Treasury yields ultimately closed at their lowest levels in over a year for the most part. For instance, the 2yr Treasury yield was down -27.1bps over the week (-9.7bps Friday) to 3.65%, which is its lowest closing level since September 2022. Similarly, the 10yr Treasury yield fell -19.4bps last week (-1.8bps Friday) to 3.71%, the lowest closing level since June 2023. With the sizeable steepening on Friday, the 2s10s curve ended the week in positive territory at +6bps, ending its longest period of inversion that had lasted since July 2022. Breakevens accounted for most of the decline in yields, with 2yr breakevens -17.4bps lower on the week to 1.49%, their lowest since November 2020. Those rates moves came as markets dialled up the amount of rate cuts priced by December from 100bps to 115bps over the week.
Over in Europe, there were similar if more moderate moves on the rates side, and the 10yr bund yield ended the week down -12.8bps (-3.6bps Friday) at 2.17%. That is its lowest closing level since February, and the moves came as investors also grew more confident that the ECB would dial up the pace of their rate cuts over the year ahead. In fact, the amount of rate cuts priced by the June 2025 meeting went up from 133bps a week ago, to 151bps by the close on Friday. So almost an entire extra 25bp cut was priced in.
Finally, one trend supporting those rate cut expectations were falling commodity prices, which took out another source of inflationary pressures. In particular, Brent crude oil prices ended the week at $71.06/bbl, their lowest closing level since December 2021. Indeed, by the end of last week they’d fallen for 6 consecutive sessions, and the weekly decline of -9.82% for Brent crude was the biggest since October 2023.
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