Stocks and bonds rally on dovish data, Powell and Treasury refunding

Headlines

* Fed extends pause but keeps door open to another hike

* US Treasury slows pace of increases at quarterly refunding announcement

* Wall Street sees relief rally after Fed decision as stocks rally for a third day

* Oil extends drop as US stockpiles build, geopolitical Middle East tensions ease

FX: USD closed nears its lows after the Fed kept another rate hike on the table. But Chair Powell poured cold water on the September dot plot and acknowledged the central bank is close to the end of the cycle. Even though growth remains surprisingly strong, tighter financial conditions are expected to weigh on economic activity, hiring and inflation. Data also came in soft with ISM notably missing forecasts (46.7 vs 49 expected).

EUR There were no major eurozone data releases. Tuesday revealed softer inflation prints and GDP. But the core and services inflation figures were probably still too high for ECB hawks especially. The major fell to a low of 1.0516 during the FOMC press conference before closing near its highs at 1.0580.

GBP had similar price action to EUR. It slid to 1.2095 before closing above 1.2150. Markets are awaiting the BoE meeting with a “hawkish hold” expected.

USD/JPY fell after hitting a fresh high yesterday at 151.72. The yen outperformed as the BoJ curbed the yields rise in JGBS while officials were said to be on “standby” regarding FX intervention. Top currency diplomat Kanda said he is concerned about one-sided, sharp FX moves and will not rule out any measures to respond to disorderly price action.

AUD rose for a fourth day in five on improved risk sentiment. Weak China data and domestic housing data were shrugged off. September trade figures are released today. The buying hit the 50-day SMA at 0.6389.

CAD remains weak after soft August GDP and potential consecutive quarterly contractions. The major is consolidating around the March high at 1.3862.

Stocks: US equities closed higher for a third day in a row. The benchmark S&P 500 added 1.05% to settle at 4237. There is a widely watched zone of support/resistance around 4200 that includes the 200-day SMA at 4243. The tech-laden Nasdaq finished 1.77% higher at 14,664. The Dow underperformed settling 0.67% up at 33,274. Stocks were buoyed by soft data, a less hawkish than expected Fed and the better than forecast quarterly refunding announcement. That ultimately all pushed Treasury yields sharply lower as bonds rallied. Attention turns to Apple earnings released after the US close today. Investors will focus on iPhone demand and consumer trends in China. Rallies in the stock had been sold of late, with it dipping below the 200-day MA for the first time since March last year. But this week’s buying spree has seen prices rebound above this marker at $171.09.  

Asian futures are in the green. APAC stocks had followed US stocks higher on Wednesday though the region had to contend with disappointing Chinese Caixin Manufacturing PMI data. The Nikkei 225 was the biggest gainer amid reports about the new economic package in Japan and currency weakness.

Gold is trying to consolidate its recent gains after selling off from the recent highs at $2009. Falling Treasury yields helped the precious metal which is a non-yielding asset.

Day Ahead – Bank of England meeting

The Bank of England is expected to keep rates at 5.25% with a second consecutive pause. This is in tune with current market pricing, with only a modest chance of another hike over the next few months. The vote should be split, though it will not be as close as the previous knife-edge decision of 5-4. Dissenter Cunliffe has been replaced by Breeden who is likely to sway with the consensus.

Ensuring rates are tight enough for long enough should be repeated by the MPC as price pressures still remain elevated, even though the disinflation trend is continuing and there’s been a welcome slowing in wage growth. Updated economic projections and the press conference are expected to show higher inflation forecasts. The bank’s 2% target won’t be hit until halfway through 2025. This implies rates need to stay higher for longer. However, Governor Bailey may stress the lagged effects of this tightening cycle. How much caution there is towards the gloomy outlook compared to the potential re-emergence of upside risks to inflation will be key for GBP.  

Chart of the Day – GBP/USD stuck in bear channel

Cable has been fairly quiet this week awaiting all the central bank meeting on the calendar this week. Prices remain in a descending channel with a series of lower lows and lower highs. This goes back the top in July above 1.31. The early October low at 1.2037 is a target for sellers of sterling. Initial resistance sits at 1.2220 and 1.2288. A major long-term Fib level (38.2%) of the October 2022 rally is at 1.2079.

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