Fed hits easing week, China economy weak

A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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After an extraordinary 30-month monetary squeeze designed to zap a post-pandemic inflation spike, the Federal Reserve is finally set to cut interest rates this week - and it's now only a matter of how much.

With another set of weak industrial and retail readings from China on Saturday and the FBI on Sunday pursuing a second failed assassination attempt on Republican presidential candidate Donald Trump, the news backdrop to this long-awaited Fed easing week is agitated to say the least.

But investors are staying focussed for now on growing speculation the first Fed cut on Wednesday will be 50 basis points rather than 25 bps - not least as some see last week's press reports as a possible steer even as Fed officials remain in their traditional pre-meeting quiet period.

People walk with umbrellas on a bridge amid rains and winds brought by Typhoon Muifa, in Shanghai, China September 14, 2022. REUTERS/Aly Song

World markets were relatively calm first thing on Monday, largely because Japanese and mainland Chinese centres were closed for holidays.

Yet the buoyancy seen at the end of last week - which took Wall Street stock benchmark back to within 1% of record highs - looks to be sustained first thing on Monday. Stock futures were higher, with those on the small cap Russell 2000 leading the way.

Fed futures now price in some 40 bps easing on Wednesday - more than a 60% chance that it will be 50 bps rather than 25 bps. Just as significantly, they pencil in 120 bps of cuts by year-end.

And with short-dated Treasury yields returning to 2022 levels, the dollar is taking much of the heat first thing.

Two-year Treasury yields fell below 3.55% for the first time in two years, sending the 2-to-10-year yield curve gap to its most positive since June 2022 at almost 9 bps.

The dollar bore the brunt of Fed-focussed trading, with its DXY index down sharply and stalking the year's lows once again. MSCI's emerging market currency index gained almost 0.25% to hit a record high. 

Relative interest rate plays dominated among the majors. With the Bank of Japan still holding out the likelihood of higher rates ahead, Japan's yen strengthened through 140 per dollar for the first time since July 2022.

And with markets assuming the Bank of England will hesitate on a second rate cut of the year when it meets on Thursday - in part awaiting next month's first budget from the new British Labour government - sterling pushed higher again too.