Milder Inflation Anticipated to Pave the Way for Rate Cuts, According to Reuters

A Look Ahead in European and Global Markets

European inflation figures are set to be released on Tuesday, with expectations leaning toward a potential downside, which could strengthen predictions that the European Central Bank will lower interest rates later this month.

Earlier this week, Germany reported a September inflation rate of 1.8% year-on-year, lower than anticipated and marking the lowest level since 2021. Additionally, inflation rates are also declining in France, Italy, and Spain, prompting markets to fully incorporate an interest rate cut for October following comments from President Christine Lagarde. She indicated that these trends would be a factor in the upcoming policy meeting on October 17.

Traders are also factoring in a further ECB cut in December. This has led to increased selling of the dollar, premised on the belief that global inflation is contained and that U.S. rates have the most room for reduction.

The euro has struggled to maintain a position above $1.12 but is holding steady above $1.11. The yen and yuan have been the primary movers in currency trading recently, with the yuan remaining stable at 7 per dollar in offshore markets. Meanwhile, the yen stabilized at 143.89 per dollar.

In the U.S., yields rose following comments from Federal Reserve Chair Jerome Powell, who stated that the policy committee is not in a rush to cut rates. However, this sentiment may quickly change based on economic data released throughout the week. The U.S. manufacturing ISM index has remained in contraction for several months, despite the economy showing resilience. Traders will pay close attention to the employment index and August job openings data. Weakness in these numbers may lead to increased speculation about a 50-basis-point rate cut by the Fed in November, with the current market pricing showing roughly a 36% chance of such a cut, down from 53% prior to Powell’s statements.

On the geopolitical front, Israel’s anticipated ground invasion of Lebanon appears to have begun, with military reports indicating "limited" raids against Hezbollah positions along the border.

Oil prices experienced a slight uptick amid these developments.

Broader trading activity in Asia was muted, influenced by regional holidays. The shutdown of markets in China has led investors to temper their optimistic views on economic recovery in the country. In Australia, shares of iron ore miners faced declines.

Recent private surveys indicated that factory activity in Asia weakened in September, highlighting soft demand in China and a challenging global economic landscape.

In Japanese politics, Shigeru Ishiba was poised to be elected as the next prime minister, while positive retail sales data from Australia provided a mild lift to the Australian dollar.

Key developments to watch for on Tuesday include:

• Eurozone inflation data
• U.S. job openings and ISM survey results.