Holidays in the US and Canada reduced liquidity, while victories by far-right parties in German state elections brought renewed political uncertainty.
The dollar held on to Friday’s gains after markets scaled back the possibility of a half-point monetary easing from the Federal Reserve following the upbeat spending data.
Futures are pricing in a 100% chance of a 25 basis point cut on September 18th, a 33% chance of a 50 basis point cut, a 100 basis point cut by December and a 120 basis point cut by 2025.
The Bank of Canada is expected to cut rates again on Wednesday, with markets suggesting a 22% chance of a 50 basis point cut. The key for the Fed is Friday’s jobs report, with analysts expecting payrolls to rise by 165,000 and the unemployment rate to fall to 4.2%. “The risks associated with this important release seem highly asymmetric: a strong report is highly unlikely to thwart a September rate cut,” said Christian Keller, economist at Barclays. “In contrast, a weak report would likely confirm the widespread view that the U.S. economy and labor market are in crisis, necessitating another swift and deep rate-cutting cycle, and would lead to another large rate cut.”
Federal Reserve Board Governor Christopher Waller and New York Fed President John Williams spoke after the jobs report was released, causing an almost immediate reaction in the market.
Also important this week will be the ISM survey, JOLTS jobs, ADP employment, trade and the Fed Beige Book.
These risks have kept investors cautious, with S&P 500 and Nasdaq futures little changed.
The dollar gains support
EUROSTOXX 50 futures were flat, while FTSE futures rose 0.3%.
Asian markets largely tracked Wall Street’s gains on Friday, with Japan’s Nikkei stock average rising 0.5%, adding to last week’s 8.7% gain.
MSCI’s broadest index of Asia-Pacific shares ex-Japan was little changed, while South Korean shares rose 0.1%.
China’s blue chip stocks fell 0.6 percent, led by a drop in property shares after a survey showed home price growth had slowed.
The Caixin manufacturing survey showed its manufacturing business conditions index rose to 50.4 in August, beating the 50.0 forecast. Surveys of factories in Japan and South Korea both showed improving activity.
Spot Treasuries were not traded due to the holiday and Treasury futures were little changed. The 10-year Treasury yield rose to 3.914% after Friday’s inflation and spending data.
The rise has supported the US dollar at 146.20 yen, which rose 1.2% last week and is now facing chart resistance around 148.54.
The euro fell 1.3% last week and is stuck at $1.1054, partly due to political uncertainty in Germany.
The European Central Bank (ECB) is expected to cut interest rates by 0.25 percentage points next week following mild EU inflation data.
“But financial markets are currently pricing in 1.5 rate cuts over the two meetings remaining this year, with the path beyond that unclear,” said Joseph Capurso, head of international economics at CBA.
“We are planning one more rate cut after September 2024, but we recognise that it will be a delicate situation as to whether we will have one or two more rate cuts.”
A stronger dollar and rising bond yields helped push gold prices to $2,497 an ounce, below its recent all-time high of $2,531.60.
Oil prices fell further in October as markets worried about a possible supply increase from OPEC+.
Brent crude fell 42 cents to $76.51 a barrel, while U.S. crude fell 38 cents to $73.17 a barrel.
