A preview of the day’s events in the US and worldwide markets from Mike Dolan
Aggressive interest rate drop bets have increased as a result of the unanticipated decline in U.S. household confidence this month and mounting job worry. This has caused Treasury rates, the value of the dollar, and stock futures to fall until Wednesday’s opening.
Rate futures now price the Federal Reserve’s next meeting’s rates at about 40 basis points below current levels, just days after November’s election, primarily on the strength of the employment signals in Tuesday’s consumer survey. This raises the probability of a half-point cut to over 50% instead of a quarter-point change.
For the first time in the past two years, two-year Treasury rates are within a hair of 3.5% following a respectable auction of new paper late yesterday. The recently favorable gap crossed 20 basis points for the first time since June 2022 as a result of a “bull steepening” of the 2-10 year yield curve, which sees two-year yields decline more than declining 10-year yields.
A hair’s breadth from its year-end low, the dollar index (.DXY) was sapped by the constellation, opens new tab, and the unexpected disruption in the growth outlook pulled U.S. stock futures off record highs ahead of Wednesday’s bell.
The Conference Board’s most recent consumer poll reported the largest decline in confidence in three years in September as concerns over the labor market grew. This put the cat among the pigeons.
Households who consider work to be “plentiful” are at their lowest point since March 2021. The so-called labor market disparity, which is based on poll participants’ opinions about how easy or difficult it is to find work, decreased to 12.6, the narrowest level in three and a half years.
And the global rush to lower interest rates continued, with China cutting its medium-term loan rate by a substantial 30 basis points on Tuesday, capping off a monetary easing blitz that also included stock purchasing incentives and a blitz of lower mortgage rates.
Chinese equities (.CSI300) opened a new tab, the yuan (.HSI) opened a new tab, and the market added to Tuesday’s gains, with the latter reaching a new 16-month high on renewed expectations that the authorities could finally be ready to step up their efforts to support the faltering economy.
Although Beijing’s most recent actions are now being given the benefit of the doubt, most foreign investors believe that credit easing will only have a chance to reverse the property crash and demand picture if it is paired with more significant fiscal action on the housing problem. A move that, to use the language of economists, is required but not yet adequate.
Even if the yuan’s gain in response to the significant rate cuts sounds strange, it seems to be more based on optimism for growth and stock market stimulus. The yield on Chinese government bonds also increased somewhat.
But China’s worries do not end with the real estate industry.
In reaction to American plans to forbid Chinese software and hardware from being installed in cars on American roads citing national security concerns, Beijing on Wednesday implored Washington to cease its “unreasonable oppression” of its companies.
Few locations would be happy to see a rise in Chinese demand.
