Stocks tried to stage a modest rally overnight after the US government shutdown was postponed by 45 days, but failed after the global bond selloff resumed on Monday, with 10-year Treasury yields back to the highest since 2007, as investors waited for another speech by Fed chair Jerome Powell to provide clues on the direction of interest rates. As of 7:30am ET, S&P futures traded unchanged from Friday's close after earlier gaining as much as 0.6% and following a September to forget in which they lost 4.7%; Nasdaq futures were 0.2% higher and continue to be disconnected with tighter financial conditions in rates as Treasury 10-year yields rose five basis points to 4.62% and back to the 16-year highs seen on Friday. The US dollar rose against most Group-of-10 currencies. Brent edged higher and traded around $92 buoyed by widespread bets that global demand will continue to run ahead of supply. Gold fell and Bitcoin gained for a third-straight day, surging above $28K. This week, we will have a busy calendar for macro data with ISMs and NFP being the focus; we will hear from 10 Fed speakers.
In premarket trading, cryptocurrency-exposed stocks rose as Bitcoin advanced to a six-week high as inflows picked up at the start of October. Riot Platforms +9%, Marathon Digital +8%. Here are some other notable premarket movers:
Stocks got a boost earlier in the session, when investors briefly felt optimistic after US lawmakers reached a deal over the weekend to avoid a government shutdown. US lawmakers passed a last-minute spending deal on Saturday to keep the government running until mid-November. Sentiment was also helped by Chinese manufacturing PMI returning to expansion for the first time in six months, although the data was mixed suggesting there’s still room for caution despite green shoots in the economy.
However, the focus in markets quickly shifted back to interest rates, especially as rising oil threaten to fan inflation. Potentially adding fuel to the fire, Powell is due to speak at a roundtable discussion alongside Philadelphia Fed President Patrick Harker. Their views will be of particular interest after New York Fed boss John Williams suggested Friday interest rates should stay high for some time.
“Financial markets were bracing for a shutdown, so there’s an element of relief, but it’s only a temporary lifting of one of the clouds hanging over the markets now,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “Interest rates and Fed hawkishness remain the name of the game and the main driver of the markets over the next few weeks.”
In Europe, benchmark indexes retreated, weighed down by losses in drugmaker stocks. The Stoxx 600 traded down 0.3% after earlier rising 0.4%. Asset manager Mandatum debuted on Helsinki’s stock market, the biggest listing in five years. here are some other notable European movers:
Earlier in the session, Asian stocks gained as sentiment was buoyed by a temporary resolution to the US government shutdown situation, while many regional markets including China and South Korea were closed for holidays. The MSCI Asia Pacific Index rose as much as 0.4% on Monday, led by real estate and technology shares. Japanese equities led gains in the region after sentiment for non-manufacturers soared to the highest in 32 years as the economy continued to recover. Australian and Taiwanese stocks also advanced.
In FX, the dollar edged higher versus its Group-of-10 peers, after enjoying its best quarter in a year. Trading in most G-10 currencies was subdued with several markets including China and South Korea closed for holidays. The Swiss franc led Group-of-10 currency gains. The euro and sterling both fell as much as 0.2% against the dollar. USD/JPY briefly extended gains and touched a year-to-date high of 149.82 after the Bank of Japan said it would conduct an additional buying operation for five- to 10-year Japanese government bonds on Oct. 4
In rates, treasury futures remain near session lows into early US session after gapping down at the open, spurred by weekend accord by US lawmakers averting a government shutdown. Rate-hike premium also edged up, with around 15bp priced into the December policy meeting vs 11bp at Friday’s close. US session includes an appearance by Fed Chair Powell, slated to take part in a roundtable discussion alongside Philadelphia Fed President Patrick Harker at 11am New York time. US yields cheaper by 4bp-7bp across the curve with belly leading losses on the day, flattening 5s30s spread by ~2bp; 10-year yields around 4.63%, cheaper by ~5bp with bunds and gilts outperforming by 2bp in the sector. Treasury coupon auctions on hiatus until 3-year note sale on Oct. 10; dollar IG issuance slate empty so far; consensus forecast is for ~$85b of new bond sales for October, with projections wide ranging between $66b and $100b.
In commodities, crude futures advance, with WTI rising 0.4% to trade near $91. Spot gold falls 0.9%.
Bitcoin is firmer on the session continuing the marked gains seen at the commencement of APAC trade despite a lack of specifics. Action which has lifted BTC to a circa. USD 28.5k high, surpassing levels from the last few weeks with the next mark around USD 29k from mid-August.
Looking ahead, investors will focus on Fed Chief Jerome Powell’s speech later Monday; US economic data slate includes September S&P manufacturing PMI (9:45am), August construction spending and September ISM manufacturing (10am)
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mixed in severely holiday-quietened conditions amid the mass closures in the region, while participants digested the key weekend developments including the US averting a government shutdown and mixed Chinese PMI data. ASX 200 was lacklustre with many domestic participants absent in observance of Labour Day in Australia’s most populous state of New South Wales and ahead of tomorrow’s RBA meeting which is the first under Governor Bullock’s tenure. Nikkei 225 opened above 32,000 with the index boosted by a weaker currency and an encouraging Tankan survey which showed Large Manufacturers’ Sentiment at its highest since June last year and the Non-Manufacturing at its highest in over three decades, although the index later pared most of the gains and eventually slipped back beneath the aforementioned key level. Hang Seng and Shanghai Comp. were shut alongside closures in South Korea and India, with mainland China away the entire week for the National Day Golden Week celebrations.
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European bourses & US futures are a touch softer after starting the session with mild gains, though action overall is contained and tentative after a limited APAC handover ahead of data & Fed speak. Currently, Euro Stoxx 50 -0.3% with sectors mainly in the red and following suit to the above broader macro tone, but action the breadth of action is relatively modest. Stateside, futures are tilting into the red after faring marginally better than their European peers in the early part of the session; newsflow has been limited and focused on weekend fiscal developments ahead of Fed's Powell and ISM metrics; ES +0.1%. EU antitrust regulators say there is no formal investigation into AI chips
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DB's Jim Reid concludes the overnight wrap
Welcome to Q4 with the markets relieved to see the end of September, and for that matter Q3, after a tough latter half to a quarter that promised a lot after a buoyant July. Henry has just published our monthly and quarterly performance review (see here) but in short, of the 38 non-currency assets we look at, only 11 were up in total return terms in Q3 and only 7 in September making it the worst month of 2023 so far. Some highlights were the +28.5% increase in WTI oil and the +73.5bps rise in 10yr US yields over Q3. 30yr USTs were +83.9bps, the largest move since Q1 2009. The S&P 500 was -4.8% in September and -3.3% in Q3 on a total return basis. YTD the index is still at +13.1% but with the equal weight only up +1.8%, a handful of stocks are providing nearly all the gains. See Henry’s piece for more.
So as we start October can we power out of the gravitational pull of bad September seasonals? September 2023 was the 4th year in a row that the S&P 500 and the STOXX 600 were down for the month, as well as the 7th year in a row that Bloomberg’s global bond aggregate was down for the month. The damage in bonds has been more severe and more sustained than for equities and you can’t help wondering where the real damage is. You can’t have this much value destruction in bonds without there being some stress somewhere. However, it’s near impossible to work out where exactly it might come to the surface.
The good news as we start the week and the new business month is that the US averted a shutdown just before the deadline on Saturday night which will keep the government running until November 17th. This gives negotiators more time to pass something more long standing. We will see if we’re in the same position in six weeks' time though. This has helped lift US equity futures by around half a percent and US bond yields are 3-4bps higher across the curve.
For now no shutdown means that US data will get published on time this week. The highlight is clearly Friday’s payrolls. Before that, the JOLTS (tomorrow) and ADP (Wednesday) data will give us some early clues. The former is a month behind but is obviously a key report to assess labour market tightness by looking at the quits rate, hirings and vacancies etc.
The highlights for the rest of the week are the US ISM and a Powell roundtable discussion today, an expected hold from the RBA tomorrow, US services PMI, Euro Zone retail sales, Euro Zone PPI and a Lagarde speech on Wednesday, French IP on Thursday with German factory orders on Friday. The full week ahead is at the end, including a bevy of central bank speakers, but we’ll quickly preview today’s ISM and Friday’s payrolls below.
Our economists and the consensus are expecting +165k for headline payrolls (+187k previously) with the unemployment rate expected to dip back down a tenth to 3.7% after surprisingly increasing three tenths last month. A reminder that every headline payroll number has now been revised lower in 2023. In early summer we were on a run of 13 successive beats but some of that has now gone with revisions. We’ll do a fuller preview in Friday’s EMR.
Today’s US manufacturing ISM (47.5 expected at DB vs. 47.6 last) and Wednesday's services ISM (54.1 vs. 54.5) are expected to be fairly stable. For the former our economists’ models suggest an uptick but the UAW strikes could offset that as perhaps foretold by a weak Chicago PMI last week. Note that it’s likely too early for this strike to impact payrolls but it could make a sizeable impact next month. For services watch for the employment index as this surprisingly soared 4 points to 54.7 last month.
Talking of such indices, the official China manufacturing PMI edged up to 50.2 (50.1 expected) over the weekend from 49.7 in August. Services also beat by a tenth to 51.7 from 51.0 in August. The private Caixin equivalents were at 50.6 and 50.2 respectively, below the 51.2 and 52.0 expected. So a mixed set of data as China starts a holiday week.
Staying in Asia, the Nikkei 225 is leading the way this morning (+0.74%) helped by the US government staying open and due to an upbeat reading for the Japan Tankan indices this morning (9 vs 6 expected for large manufacturers and 27 vs 24 for large non-manufacturers). The rest of the session is quiet with many markets closed for holidays.
Turning back to last week now, on Friday we got some encouraging inflation news in what a challenging week for financial markets. On that inflation news, key metrics of monthly core inflation came in below 2% annualised on both sides of the Atlantic. In the US, the headline August PCE data release came in below expectations at 0.4% month-on-month (vs 0.5% expected). In year-on-year terms, the PCE result was as expected at 3.5%, up from 3.3% in July. Core PCE also surprised to the downside at 0.1% month-on-month (vs 0.2% expected). In year-on-year terms, core was at 3.9% as expected, down from 4.2% in the previous month.
The positive inflation news saw US 10yr Treasuries slightly pare back losses from earlier in the week, with 10yr yields down -0.4bps and 2yrs down -1.3bps. Week-on-week, 10yr yields gained +13.7bps to 4.57%, their highest weekly close since 2007. With short-end rates rallying over the week, the 2s10s curve steepened by +20.4bps week-on-week (and +0.9bps on Friday), reaching its least inverted since May (-47.6bps). It was 30yr Treasuries that underwent the greatest sell-off last week, rising +17.5bps to 4.70% (-0.5bps on Friday). Overall, it was frenetic week for US rates, with the MOVE index of rates volatility up +12.4pts (-1.7pts on Friday).
Meanwhile, in Europe, Euro Area September HICP came in below expectations at 4.3% year-on-year (vs 4.5% expected), down from 5.2% in August, while core inflation came in at 4.5% (vs 4.8% expected and 5.3% in July). Notably, the ECB’s estimate of the seasonally adjusted monthly core inflation rate was +0.1% mom, its lowest since spring 2021. This new evidence of slowing inflation momentum brought a breath of fresh air to the European fixed income market, with 10yr German bund yields down -9.0bps on Friday. They still rose +7.9xbps week-on-week to 2.84%, their highest weekly close since 2011. French OAT yields gained +11.2bps in weekly terms (-9.2bps on Friday) and Italian BTP yields were up +19.0bps (and -8.6bps on Friday) after concerns over their budget. 10yr gilt yields rose +18.8bps in their largest weekly increase since early July (-4.7bps Friday).
Rising rates were a dampener for equity markets, with the S&P 500 falling for the fourth week in a row, down -0.74%(and -0.27% on Friday) to its lowest since early June. Technology outperformed, with the NASDAQ seeing a marginal gain of +0.06% (+0.14% on Friday). NVIDIA spearheaded the tech resilience, gaining +4.54% last week (and +0.95% on Friday), with Tesla (+2.18%, and +1.56% on Friday) also helping. In Europe, the STOXX 600 gained +0.38% on Friday but fell back -0.67% in weekly terms to its lowest level since mid-August.
Over in commodities, the oil rally took a breather on Friday but remained elevated against a backdrop of tight supply. Oil product supply is also getting tighter as Russia plans near zero diesel exports next month following its temporary ban on gasoline exports. Accordingly, Brent crude traded flat on Friday (-0.07%) but was up +2.19% week-on-week to reach $95.31/bbl, its highest weekly level since last November. WTI crude slipped back more significantly on Friday (-1.00%) but was still up +0.84% on the week.
In other commodity news, gold fell back -3.98% last week (and -0.80% on Friday) to $1,849/ounce, hitting its lowest level since February after its largest weekly decline since 2021. The downward momentum comes after Fed policymakers indicated they intended to keep policy tight for a longer period, pushing gold prices below the $1,900/ounce support level that had largely held since March.