US equity futures are higher ahead of today's French vote of confidence which should end the Bayrou government, and into major inflation updates this week. As of 8:0am ET, S&P futures are up 0.2% and on pace for another record high after Friday's post payrolls drop; Nasdaq futures gain 0.4% with all Mag7 names higher premarket, ex-AAPL which is flat into its product event tomorrow. Large caps are higher across virtually all sectors. In overnight news, US is reportedly considering annual export approvals to chip facilities in China. The yield curve is twisting steeper and the DXY is flat as USD / JPY appreciates after PM Ishiba announced his resignation, but is well off its session highs. Commodities are stronger, led by Energy, after OPEC+ confirmed a smaller than expected production increase of 137k bpd in Oct. Gold / silver continue to run higher, with the former hitting another record high of $3622; Ags are weaker. Today’s macro data focus is on NY Fed’s 1-Yr inflation expectations and Consumer Credit.
In premarket trading, Magnificent Seven stocks are rising with the exception of AAPL (Tesla +1.3%, Microsoft +0.9%, Nvidia +0.5%, Amazon +0.4%, Meta +0.3%, Alphabet +0.4%, Apple -0.04%).
With stocks back at all time highs, investors will have to consider whether a cracking labor market could stall consumer spending, posing a headwind to equities. “For the time being, though, oodles of AI CapEx from the hyperscalers, plus solid earnings growth, calmer tones prevailing on trade, and a more accommodative policy stance, should all keep the path of least resistance leading higher,” Pepperstone strategist Michael Brown wrote. Among other events scheduled for the week, the ECB is expected to hold rates steady on Thursday, though President Christine Lagarde’s remarks will be parsed for signals on her readiness to contain French turbulence.
On Tuesday, the Bureau of Labor Statistics will release its preliminary payroll benchmark revision for the year through March, with another downward adjustment likely to show the labor market was weakening well before the recent slowdown in jobs growth.
Thursday’s consumer-price data is projected to show that progress on reducing inflation has stalled as higher US import duties filter through the economy. Still, investors see Fed officials lowering rates at their upcoming meeting, with some even expecting a jumbo half-point cut.
“Our economists believe you’d need to see pretty weak inflation this week to get that,” wrote Jim Reid, global head of macro research and thematic strategy at Deutsche Bank AG. “Of course, the focus will very much be on the continued impact of the tariffs in core goods categories, and we know these are still filtering through.”
In Europe, the Stoxx 600 rises 0.2% while the CAC 40 adds 0.3% ahead of a confidence vote in the French parliament later on Monday, where Prime Minister Bayrou’s government is likely to fall. The advance was fueled by energy stocks amid rising crude prices. The region’s bonds were broadly steady. Major markets are all higher led by Germany with UK lagging.
Earlier in the session, Asian equities rose, with Japanese stocks leading gains as investors looked to new leadership after Prime Minister Shigeru Ishiba announced his intention to step down. The MSCI Asia Pacific Index advanced as much as 0.8%, rising for a third session, with technology stocks including Alibaba, Tencent and Nintendo among the major contributors. Equity benchmarks in Japan added more than 1%, supported by a weaker yen and hopes for economic growth under the next government. While Ishiba’s departure had been expected since the ruling party’s poor election showing in July, uncertainty remained as he indicated his intention to stay on after securing lower US auto tariffs. Focus now shifts to who his successor will be, and the impact on plans for fiscal expansion and stimulus as well as central bank policy. Shares also gained Monday in Hong Kong, Taiwan and India, but slipped in Australia and Vietnam. Thailand’s SET gauge advanced as Anutin Charnvirakul’s election as prime minister was seen bringing stability after recent political turmoil. Asian equities overall have been tracking gains in global peers, as bets solidify for a Federal Reserve interest-rate cut later this month. The MSCI Asian stock benchmark is now around 3% away from topping its record high reached in 2021.
In FX, the euro is flat versus the dollar. OATs are also little changed with minimal movement in the 10-year yield spread with Germany. The yen has pared an earlier decline seen after Japanese Prime Minister Ishiba announced that he will step down. USD/JPY is up 0.2% at 147.70. The Bloomberg Dollar Spot Index falls 0.1% while the kiwi and Aussie dollar are leading gains against the greenback, rising 0.5% and 0.4% respectively.
In rates, treasuries are mixed in early US session, with intermediate to long-end yields cheaper and front-end tenors richer. 10-year yield near 4.07% is about 1bp lower on the day. UK and German counterparts outperforming by slightly; European regional yields are lower as curves bull flatten while Gilts curve bear flattens. Last week’s yield declines are stoking corporate bond sales anticipated to total $45 billion to $50 billion, concentrated ahead of August PPI and CPI reports Wednesday and Thursday. Political instability in Japan and France is also in focus. Fed officials are in external communications blackout ahead of Sept. 17 rate decision.
In commodities, WTI crude futures climb 2% to $63 a barrel after OPEC+ agreed to raise production at a modest rate. Spot gold rises $27 to a record.
The US economic data slate includes August New York Fed 1-year inflation expectations (11am New York time) and July consumer credit (3pm). In addition to PPI and CPI, Empire manufacturing and University of Michigan sentiment are ahead this week. On Tuesday, the Bureau of Labor Statistics will release its preliminary payroll benchmark revision for the year through March, and another downward revision is expected
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APAC stocks began the week mostly positive but with some of the gains capped amid several key market themes, including last Friday's disappointing US jobs data and the subsequent boost in Fed rate cut bets, as well as Japanese PM Ishiba's resignation announcement and the latest Chinese trade data. ASX 200 was dragged lower by weakness in energy, utilities and financials, while participants also reflect on the latest Chinese trade data. Nikkei 225 outperformed amid a weaker currency and as the political uncertainty following Japanese PM Ishiba's resignation, was seen as potentially delaying the BoJ resuming its rate hikes, while upward revisions to Q2 GDP added to the heightened risk appetite in Tokyo. Hang Seng and Shanghai Comp were ultimately positive but with cautiousness seen amid the latest Chinese trade data in which exports and imports missed forecasts, while there was also a recent report that US-China trade talks have made little progress towards a deal, and an impasse was hit on the fentanyl issue.
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European bourses (STOXX 600 +0.2%) opened with a positive bias and have traded sideways throughout the morning so far – action which follows on from similar sentiment in the APAC region. European sectors opened with a strong positive bias but are now mixed. Construction & Materials takes the top spot, joined closely by Energy and then Industrials to complete the top three. For Energy specifically; the complex has been boosted by significant upside in the crude benchmarks after eight core OPEC+ countries upped its oil output target by 137k bpd in October. For Industrials, the sector has seemingly been boosted by Alstom (+1%) after it received a EUR 538mln contract.
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US Event Calendar
DB's Jim Reid concludes the overnight wrap
It's another bumper week of events as we build to next week's FOMC. Although the Fed is now on its media blackout, Wednesday's PPI and especially Thursday's CPI will shape pricing ahead of that, with all eyes still focused on the tariff impact. 28bps of cuts are now priced in for the next meeting, so a quarter-point cut is fully priced but without much being priced in for a 50bps move. Our economists believe you’d need to see pretty weak inflation this week to get that. We'll preview that US inflation data below but before we do the main highlights for the rest of the week are: the French confidence vote in the National Assembly, German industrial production and the New York Fed’s inflation expectations today; the preliminary annual benchmark revisions by the US BLS for payrolls tomorrow; Chinese inflation, the State of the Union address by European Commission President von der Leyen, and a 10yr UST auction on Wednesday; the ECB decision and a 30yr UST auction on Thursday; and finally on Friday there’s the University of Michigan survey.
We’ll go through a few of these events now and review Friday’s payrolls and its impact below. But let’s first take a look at what’s expected in Thursday’s US CPI. In their preview here (“Webinar: August CPI preview & webinar registration”), our US economists are expecting monthly headline CPI to rise to +0.36% in August, which would be the strongest monthly print since January. That’s partly because of their forecast for a +1.7% increase in seasonally adjusted gas prices, along with some positive payback in food-at-home prices. So, they think core CPI will be a little weaker at +0.32%, although that would still be in line with the six-month high we had last month. If that’s correct, then that would lift the year-on-year headline number by two-tenths to +2.9%, with core edging up a little but still rounding to +3.1%, the same as last month. Of course, the focus will very much be on the continued impact of the tariffs in core goods categories, and we know these are still filtering through, given several rates like the 50% on copper only came into force last month.
In terms of the implications for the Fed, the jobs report on Friday has seen the tide turn to increasing concern about tepid employment growth rather than permanently above-target inflation. That report showed nonfarm payrolls up just +22k (down from +79k in July and clearly beneath the +75k print expected). Moreover, there were another -21k of downward revisions to the previous two months, which was well below the huge -258k revisions in the previous report, but still the 6th time in the last 7 months that the revisions had been negative. So that meant the unemployment rate moved up a tenth to 4.3%, the highest since October 2021. And the broader U6 measure (which includes underemployed and marginally attached workers) moved up to 8.1%, again the highest since October 2021. As it stands, the latest revisions mean that June this year has a -13k print, which is the first negative month since December 2020. It also marks an end to the second-longest streak of consecutive positive payroll prints in data back to 1939. See our economists’ “August employment: Summer slump redux” for more. The one caveat they discuss around the weak data is that the slide in payrolls does look similar to that seen between June and August last year even if there is evidence of labour market weakness in the numbers.
Overall, they don’t view the report as soft enough to push the FOMC towards a larger-than-usual 50bp cut next week, partly because the median dot in June was in line with two cuts and an unemployment rate at 4.5% by year-end. So nothing out of the ordinary yet relative to this. However, keep an eye out for the preliminary BLS annual benchmark revisions tomorrow for another rewrite of history. These only impact the period to March so it won’t have anything about the most recent five months. But there are likely to be downward revisions of as much as 50-60k per month over the year according to our economists, based on the survey linked to the revisions calculations. Bessent nodded to this sort of number yesterday in a press interview.
Elsewhere, we see what is likely to be a low-key ECB decision on Thursday. Our European economists expect them to keep the deposit rate on hold at 2% and think the ECB has reached its terminal rate in this cycle. In their preview here, they look at what is needed to build the case for a further easing.
More importantly in Europe is today's confidence vote in France. Proceedings start at 3pm local time with the vote results likely to be known after 5pm CET. That’s likely to see a defeat for Prime Minister Bayrou’s minority government, but most interesting is what happens next. President Macron is expected to nominate a new PM that could achieve a majority to pass the budget. This would probably require the backing of the centre-left Socialists as the right-wing populist National Rally has called for snap parliamentary elections to be held. There are also general strikes called in France for September 10 and September 18, and Politico reported over the weekend that Macron is aiming to have Bayrou’s replacement lined up before the second one of these. At the start of last week, France’s fiscal situation was a real pressing issue for markets, along with the UK gilt market selloff, but the US bond rally has taken some of the sting out of this. Nevertheless, both countries remain in a precarious situation if global rates turn again.
Speaking of politics, Japan’s PM Ishiba announced over the weekend that he will step down, after several weeks of speculation after the poor summer election results. The leadership race will now take place and likely take 2-3 weeks, although the new LDP leader will need some support from opposition parties to become PM given LDP-Komeito have lost their majority. A key issue at stake is the direction of monetary policy, and the two front runners seem to be Koizumi and Takaichi with the former more likely to coincide with higher Japanese rates. That’s contributed to a weaker Japanese yen overnight, which has fallen by -0.48% against the US Dollar to 148.15 per dollar. Meanwhile, yields are fairly stable, and the Nikkei (+1.33%) is closing back on its record high this morning after there were decent upward revisions to Japan’s growth data. It showed the economy growing at an annualised +2.2% rate in Q2, having initially pointed to a +1.0% rate. So that means the economy has expanded for 5 consecutive quarters now, the longest run since 2016-18.
On that data theme, China’s trade numbers overnight showed export growth slowing to +4.4% year-on-year in August, which is its slowest in 6 months. Similarly, import growth also slowed to +1.3% (vs. +3.4% expected). That’s been driven by a big decline in exports to the US given the higher tariffs, with US exports down -33.1% on the previous year in August. But the major equity indices have mostly held up this morning across Asia, not least as expectations mount that the Fed will cut rates next week after the jobs report So the Hang Seng has advanced +0.35%, the Shanghai Comp (+0.17%) and the KOSPI (+0.12%) have posted modest gains, and the CSI 300 is only down -0.01%. US equity futures are also positive, with those on the S&P 500 up +0.09%, whilst Treasury yields have pared back their Friday declines, with the 10yr yield up +2.5bps to 4.10%.
Recapping last week in more detail now. US equities posted a modest advance, with the S&P 500 still up +0.33% (-0.32% on Friday), even as jitters mounted about a labour market slowdown give the jobs report. Interestingly, tech stocks outperformed despite initial concerns over AI-linked valuations, pushing the NASDAQ up +1.14% for the week (-0.03% Friday), whilst the Mag 7 were up +2.17% (-0.27% Friday). Equities were softer in Europe however, with the STOXX 600 -0.17% lower (-0.16% on Friday), with the DAX (-1.28%, -0.73% on Friday) and FTSE MIB (-1.39%, -0.91% Friday) leading the declines.
For bonds, last week started with a major selloff that initially pushed yields up to multi-year highs. Indeed, the 30yr UK gilt yield reached its highest since May 1998, and French OATs moved up to levels last seen in 2009 amidst ongoing fiscal concerns. But the US jobs report meant that reversed by the weekend as investors priced in faster rate cuts. So that left 2yr Treasury yields -10.8bps lower on the week (-7.9bps on Friday), while 10yr yields fell by a larger -15.4bps to 4.08% (-8.6bps on Friday), and 30yr yields by -16.9bps to 4.76% despite being just a whisker away from 5% on Tuesday. This reversal of the August curve steepening came despite ongoing questions about Fed independence. In a WSJ op-ed on Friday, Treasury Secretary Scott Bessent criticised the Fed for “mission creep” and called for an independent review of the central bank. Meanwhile in Europe, bonds saw a more modest rally, with 10yr bund yields down -6.2bps on the week to 2.66% while 10yr gilt yields fell -7.6bps to 4.65%.
The rally in bonds was also supported by lower oil prices, with Brent crude falling -3.85% (-2.22% Friday) to a 3-month low of $65.50/bbl amid the weaker US outlook as well as the news that OPEC+ was considering another oil production increase in October. This was confirmed over the weekend, with the group agreeing to raise production by 137kbbl/day. That said, the group’s statement also signaled some caution, with any further return of production “subject to evolving market conditions”. Brent crude oil prices are +1.21% higher this morning as a result. Meanwhile, with all the two-way turmoil last week, gold had its best week since April (+4.02%), reaching a new all-time high of $3,587/oz.