A soft US core PCE (and weak European CPIs) ended the risk-friendly week with a treasury bull curve steepening move, and equities (US + China) both hovering at cycle highs. On a 3m/3m basis, core inflation has settled back to around the 2% annualized level across both CPI and PCE, settling back down towards the Fed’s 2% long-term target and allowing the Fed to remain focused on the labour side of the dual mandate. Post CPI, a number of investment banks have reiterated their calls for a 50bp cut in December, with rate futures back to pricing in ~50% of a 50bp cut in November.
On the other hand, US consumer sentiment jumped to the highest levels in 5 months on the back of the aggressive Fed ease and lower gas prices. The global beta trade appears to be picking up with Chinese and HK equities enjoying their best week in years (+16% on CSI 300) thanks to China’s ‘bazooka’ stimulus, with famed investor David Tepper urging investors to buy ‘everything’ China-related post PBoC’s easing announcements.
As a case in point, iron ore jumped 20% since the end of September on the easing of China’s home-buying rules, while the rapid surge in activities led to trading glitches on the Shanghai Stock Exchange, with China’s ETF inflows seeing the highest daily volumes since 2021.
While the US and China markets appear to be firing on all-cylinders, Japanese equities are facing some renewed turbulence with a surprising election win from Mr. Shigeru Ishida. Ishiba-san, a former defense minister , was a vocal opponent of ‘Abenomics’ back in the days, and is a supporter of BoJ’s policy normalization plans. Japanese equity futures fell 6% and the JPY cratered to 142 as investors fretted over further BoJ hikes and a more aggressive geopolitical stance with the new PM. All eyes will be on the BoJ as they speak this week.
Back over in the US, this will be an important data week with JOLTS, ISM Manufacturing & Services, and of course, NFP. There will be plenty of Fedspeak as well, but markets do not expect committee members to ‘rock the boat’ despite US financial conditions loosening back to cycle highs. Powell will be speaking at the National Association for Business Economics conference on Monday with a topic on the US economic outlook, but investors are likely expecting him to speak more of the same as per the last FOMC, especially with the recent inflation data moving in his favour since his last dovish Q&A.
Furthermore, we will also see the US Vice Presidential Debate on Tues evening in NY, though markets do not expect it to have much sway in the polls, which is still calling for a very tight race. China’s Golden Week holidays will begin tomorrow, so expect more subdued trading activities across both macro and crypto in the Asia hours for the rest of this week.
Over in crypto, Bitcoin has been a strong benefactor here of the easing liquidity backdrop, with robust economic growth, steady corp earnings, and dovish central bankers providing a solid foundation for a strong Q4 BTC rally. While ETF outflows have been disappointing since July (-610M for ETH, -330M for BTC), the recent rally has seen an outperformance from Ethereum, with altcoins also making a strong come back.
With crypto correlations staying high to macro assets, particularly against the SPX, we would consider the friendly macro background to remain a strong tailwind for crypto prices into Q4. Furthermore, with the Kamala camp playing lip-service to crypto ‘support’ as part of her campaign rhetoric, we remain bullish on price action in the near-term, with targetted put-selling strategies likely to be popular as investors switch into a ‘buy-the-dip’ mode. Good luck and happy holidays!
