US PCE in Focus as China Rebound Gains Momentum – Reuters

Market Overview: Insights from Mike Dolan

As the final full week of the quarter draws to a close, U.S. stocks are reaching new heights, buoyed by aggressive monetary easing in China and Wall Street’s anticipation of the Federal Reserve’s preferred inflation indicator.

This week has seen a flurry of interest rate cuts and supportive measures for real estate and the stock market from China’s central bank. On Friday, the bank cut its one-week reverse repo rate by an additional 20 basis points as it responds to what it perceives as a troubling economic slowdown that risks jeopardizing 2024 targets. Reports indicate that major cities like Shanghai and Shenzhen plan to remove the last barriers to home purchases to stimulate interest and support struggling real estate markets.

Despite uncertainties around the effectiveness of these stimulus measures, China’s intent has become increasingly clear, particularly against the backdrop of stark economic data. In August, profits from Chinese industries dropped sharply by nearly 18% year-on-year, highlighting significant challenges.

As mainland Chinese stock indices surged, marking their best week in recent times, bond markets reacted as well. Ten-year Chinese government bond yields rose but pulled back from 16-month highs amid selling from state banks.

Meanwhile, U.S. markets are reflecting robust economic indicators. A recent decline in weekly jobless claims, strong durable goods orders, and a revision of second-quarter corporate profit growth to 3.5% have reinforced confidence. Focus is now shifting back to inflation figures, with the August personal consumption expenditures (PCE) index due for release later. Experts anticipate a 0.2% increase in core PCE for the month, potentially nudging the annual rate from 2.6% to 2.7%. Federal Reserve Governor Christopher Waller noted that softer components in this report influenced the recent significant rate cut of 50 basis points.

Fed Governor Lisa Cook expressed her full support for the decision to cut rates, citing rising "downside risks" to employment. Treasury Secretary Janet Yellen suggested that the economy is on track for a ‘soft landing,’ allowing Fed rates to return to ‘neutral’ levels, possibly around 3%.

In light of the latest economic data, market expectations for a subsequent 50-basis point rate cut in the Fed’s November meeting stand at about 50%, with a 25-basis point cut likely and considerations for a total of 75 basis points by year-end.

U.S. 10-year Treasury yields steadied after rising earlier in the week, while 30-year fixed mortgage rates dipped to a two-year low of 6.08%. The euro weakened as inflation figures in the Eurozone have put pressure on the European Central Bank (ECB) to continue lowering interest rates. Money markets now anticipate another 50-basis point cut from the ECB by year’s end. France’s inflation rate unexpectedly fell to 1.5% in September, well under the ECB’s 2% target, largely due to falling energy prices.

As the disinflation trend grows, ECB sources indicate that some dovish council members are advocating for a third rate cut this year in the upcoming October policy meeting. In Germany, unemployment numbers rose more than anticipated in September, reflecting ongoing economic challenges.

The Bank of Mexico recently cut its benchmark interest rate by 25 basis points to 10.50%, marking its second consecutive cut as inflation pressures ease in the country.

In Japan, the yen recovered after Shigeru Ishiba, a former defense minister and monetary policy critic, secured leadership of the ruling Liberal Democratic Party, positioning him as the next prime minister. Ishiba expressed support for the current policy trajectory while advocating for rate increases.

Key economic developments to watch later on Friday include:

• U.S. August PCE inflation gauge, personal income and consumption, August trade balance, and retail and wholesale inventories
• Final September sentiment survey from the University of Michigan
• Remarks from Federal Reserve Board Governor Michelle Bowman

This overview provides valuable insights into the evolving dynamics in both U.S. and global markets as they navigate economic signals.