Nikkei Declines, China Gains – Reuters

Market Overview: Insights for the Day Ahead

As we look ahead to the trading day in European and global markets, there’s a wealth of news to digest, ranging from tensions in the Middle East to fresh stimulus measures announced from Beijing. The Japanese stock market grabbed attention with a significant drop of 4.6%, as investors anticipated the implications of higher interest rates under the new Prime Minister, Shigeru Ishiba.

Ishiba has been a vocal critic of the Bank of Japan’s ultra-loose monetary policies, leading many to believe that he may facilitate a shift towards policy normalization. However, his recent remarks over the weekend hinted at a more conciliatory approach, acknowledging the necessity of easy monetary policy given the current economic climate.

While markets currently indicate minimal likelihood for a rate hike from the Bank of Japan in October, expectations for December show an anticipation of a modest increase, with about a 24% chance of a quarter-point rise. Nevertheless, forecasts suggest that the current interest rate of 0.25% may only increase to 0.5% by the end of next year, signaling a cautious outlook.

Ishiba’s comments provided some stability for the dollar, which traded at 142.64 yen after a notable drop to 142.07 on Friday. The euro also saw a slight increase, reaching $1.1170, buoyed by favorable data from the U.S. core PCE price index.

In the U.S., upcoming economic data has positioned markets to factor in a 52% probability of a substantial rate cut from the Federal Reserve during its meeting on November 7. However, the presidential election adds uncertainty to these predictions. A potential victory for Donald Trump could lead to concerns over higher inflation and a stronger dollar, given his previous advocacy for increased tariffs. Current polling shows Vice President Kamala Harris slightly ahead, though the margin is not decisive.

This week, several Federal Reserve officials, including Chair Jerome Powell, will be sharing their insights, with Friday’s payroll report expected to play a significant role in determining the magnitude of any rate adjustments.

In contrast to Japan’s market decline, Chinese stocks rallied impressively, climbing 5% after the central bank announced plans to lower mortgage rates. The property sector received a boost as major cities like Guangzhou lifted home purchase restrictions, with Shanghai and Shenzhen also easing buying regulations.

This influx of stimulus measures helped counterbalance a decline in the Caixin/S&P Global manufacturing PMI, which fell to 49.3 in September, along with a slowdown in the services PMI to 50.3.

Key Market Influencers for Monday:

• German CPI and retail sales data, as well as French CPI figures, will be released.
• An introductory statement from ECB President Christine Lagarde at the ECON Hearing, alongside a panel discussion featuring Bank of England policymaker Megan Greene.
• Federal Reserve Chair Jerome Powell will discuss the economic outlook, with contributions from Fed Board Governor Michelle Bowman.
• U.S. data on the Chicago PMI and the Dallas Fed activity index will also be reported.

Stay tuned as these developments unfold in the coming days.