U.S. Indexes closed lower, putting the recent rally on standby for now. The sector breakdown saw Energy outperform amid a rebound in crude prices; meanwhile, Consumer Discretionary and Technology lagged. NVIDIA (NVDA, -2.8%) pared some of Monday’s upside on the OpenAI deal, which was the biggest weight contributing to SPX’s 0.6% and NDX’s 0.7% decline, followed by Amazon (AMZN, -3%). US data was contained to the S&P Global Flash PMI, which largely met expectations, resulting in a muted reaction across assets. PMIs out of Europe, however, diverged. France and the UK missed while Germany beat in Services. The Euro was initially weighed down by the French reading before later recovering after Germany’s reading. Both the Dollar and T-Notes saw a fleeting hawkish reaction towards Fed Chair Powell’s text release on the economic outlook. The Chair mostly reiterated his recent remarks but highlighted that most members’ base case on tariffs’ inflation impact is that it will be a one-time pass-through, finished by the end of next year. Other Fed speakers included the Vice Chair of Supervision, Bowman, who sees two more 25bps rate cuts, putting her in line with the FFR Fed median for 2025. The US sold USD 69 billion of 2 Year Treasury Notes, met with mediocre demand relative to the past and six-auction average; 2yr was muted in response. In commodities, crude prices benefited from Interfax reports that Russia is considering extending its gasoline export ban. Meanwhile, gold extended into a three-day rally, supported by BBG reports that China is aiming to become a custodian of foreign sovereign gold reserves as it aims to improve its standing on the global bullion market. S&P Global US Flash Manufacturing PMI for September slipped to 52.0 from 53.0, in line with expectations, while the Services gauge eased to 53.9 (exp. 54.0) from 54.5, leaving the composite PMI down 1 point to 53.6. S&P said the data points to 2.2% annualised GDP growth in Q3 (note: the Atlanta Fed’s GDPnow tracker is currently modelling growth of 3.3% in Q3), though growth slowed from July and hiring weakened in September. S&P said that the softening demand was limiting pricing power, and inventories suggest downside risks to future production, yet consumer inflation is expected to remain above the Fed’s 2% target in the near term. Pantheon Macroeconomics still looks for GDP growth of “2% in Q3, followed by just ½% in Q4”. Fed Chair Powell’s remarks and tone were generally very similar to his post-FOMC meeting remarks made last week, following the Fed’s 25bps rate reduction, conveying that the Fed cut rates due to downside risks to employment. Markets saw a fleeting hawkish reaction in the wake of his initial remarks but quickly pared back. Ahead of the Fed’s October 29th meeting, Powell said the Fed policy decision will depend on how the labour market is faring, growth, and inflation data. Powell said that policy must balance both employment and inflation goals, and he emphasised a readiness to adjust if current measures prove misaligned, while preparing for a range of possible economic outcomes. Ahead of PCE inflation data this week, Powell said that inflation has risen, with total PCE prices seen up 2.7% Y/Y (vs 2.6% Y/Y in July, and 2.3% in August 2024); Core PCE prices are expected to have increased 2.9% Y/Y (matching the July reading), driven by goods price rises, mainly reflecting tariffs. The Fed chair noted that services disinflation continues, and most long-term inflation expectations remain consistent with the 2% target, suggesting tariff-driven effects may be short-lived (Powell sees these as being a one-time pass-through, finished by the end of next year). On financial assets, Powell described equity prices as fairly highly valued, and the Fed is not targeting prices for financial assets. Bowman, the Fed’s Vice Chair of Supervision backed a 25bps reduction at last week’s meeting, arguing that it is important for the Fed to now proactively support the labour market. Overall, she showed more concern towards the labour market than inflation, expressing worries that the Fed is behind the curve amid labour market weakness. Bowman described last week’s rate cut as the first step towards a more neutral rate, if the economy evolves as expected. On inflation, she said the tariff impact will fade; inflation is otherwise near target. Bowman also expressed concerns that weakness in housing could lead to a decline in values. Ahead, she said, policy could need to adjust further if risks materialise, and businesses could begin laying off people if demand conditions do not improve. Bowman backed her previous stance looking for three 25bps Fed rate cuts in 2025 (one of which we got last week), putting her line with the Fed’s median view. Finally, Goolsbee a 2025 voter said the US remains in a “low hiring, low layoffs” phase and the labour market continued to cool at a moderate pace, but job stats show stability. Goolsbee called the current policy ‘mildly restrictive’ and said that current rates exceed neutral by between 100-125bps (note: the Fed pencilled in a neutral rate of 3.0% in its projections last week). When asked about the prospects for a potentially larger 50bps rate reduction, the Chicago Fed President said the Committee must be careful about getting aggressive. Ahead, he said that interest rates may stabilise at 3% once inflation returns to 2%, and that rates could fall significantly once stagflation concerns subside. Elsewhere, Oil closed higher by over 2% while Gold ended Tuesday’s trading with a small 0.5% gain.
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