ECB cut again, Fed is next on Wednesday

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• Presidentail debate with plenty of jabs but no details

• Energy prices fall but inflation remains sticky

• ECB cut again, Fed is next on Wednesday

• Japan warns about another hike, boosting the yen further

• Equities in the green territory, rebounding from last week's slide

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: Following the US presidential debate between Kamala Harris and Donald Trump, the yield on the US 10-year Treasury note fell to 3.65% before ending the trading week 1 basis point higher, still marking its lowest level since May 2023 (vs. recent high of 4.70% in April). The debate's outcome has barely changed the market expectations regarding future economic policies, as the details from both candidates were scarce. Investors now anticipate the upcoming Fed's decisions on interest rates next week.

• The week’s relatively light economic calendar was dominated by the Labor Department’s inflation reports. The annual core Consumer Price Index eased to 2.5% in August, down from 2.9% in July and slightly below the projected 2.6%. The Consumer Price Index (CPI) increased by 0.2% in August, matching July's rise, primarily due to a 0.5% uptick in shelter costs, while energy prices dropped significantly, with gasoline prices down by 10.3%. Nonetheless, core inflation (excluding food and energy prices), stayes at higher 3.2%, as the monthly reading inched up to 0.3%.

• The probability of a larger 50 basis point rate cut in the U.S. has climbed to 50% in recent days, despite the Federal Reserve being in its blackout period and the absence of major economic data releases. This shift is questionably influenced by a few articles in the Financial Times and Bloomberg advocating for a more substantial cut next week. While the debate over a 25 versus 50 basis point cut is ongoing, the more critical issue is what the Fed's rate-cutting strategy will be after its cycle begins on Wednesday, regardless of the size of the initial reduction. Adding to the challenge, the Fed’s next meeting after next week is on November 7, just two days after the U.S. presidential election, when the outcome may still be uncertain, complicating decisions amid heightened political volatility.

• EU: The European Central Bank has lowered interest rates by 0.25 percentage points to 3.5%, citing declining Eurozone inflation and signs of an economic slowdown. ECB President Christine Lagarde stated that Thursday's decision to cut the benchmark deposit rate—the second reduction this year—was "unanimously decided," unlike June's divided vote. Inflation in the Eurozone fell to a three-year low of 2.2% in August, down from 2.6% in July. The ECB maintained its inflation projections at 2.5% for 2024 and 2.2% for 2025. Following the rate cut, the euro strengthened by 0.2% against the dollar, while yields on two-year German Bunds—used as a key measure of Eurozone borrowing costs—climbed 0.085 percentage points to 2.22%, amid market worries about weak demand, subdued private consumption, and soft investment.

• The implied probability of another ECB rate cut in October stands at 50%, reflecting concerns about risks of the persistent inflation and the limited time available before the next meeting for committee members to make a decisive call on the rate cut

• Japan: Expectations for a potential interest rate hike by the Bank of Japan(BoJ) later this year were reinforced by recent remarks from central bank board members. Junko Nakagawa highlighted that the degree of monetary easing might be adjusted based on Japan’s economic and inflation outlook, given that current real rates are exceptionally low. Additionally, Naoki Tamura suggested that the short-term rate should be increased to at least around 1% in the latter half of the BoJ’s projection period through fiscal 2026 to address inflation risks and ensure price stability.

• Despite these hawkish signals, the yield on the 10-year Japanese government bond fell to 0.84% from 0.86% the previous week, because it followed a similar trend to U.S. bond yields amid speculation that the Fed might implement a more aggressive 50-basis-point rate cut in its September meeting. The consumer goods price index in Japan rose 2.5% year on year in August, slowing from the previous month’s 3.0%, albeit higher than 2% target. The clear winner in the Fed monetary easing and potential tightening by BoJ? The yen.

Equity Markets

• Stocks posted solid gains this week, largely recovering from the steep losses of the previous week that affected all major indices. The S&P 500, NASDAQ, and Dow rose by 3.4%, 5%, and 2.1% respectively. Growth stocks significantly outperformed value shares, bolstered by strong performance in technology stocks. September's trading volatility was notably reflected in the mentioned information technology sector, which dropped 7% at the beginning of the month but rebounded by 7% in the latest week. NVIDIA, in particular, grew by more than 13% after the company’s CEO revived stock perfomance last week by providing a positive outlook on artificial intelligence at an investment conference.

Commodity Markets

• Gold: Gold futures surpassed $2,600 per ounce for the first time on Friday, continuing a recent rally in the precious metal. Gold, which was trading around $2,060 at the end of last year, first crossed the $2,500 mark on August 19.

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