European and Global Market Overview

Insights from Tom Westbrook

European inflation figures are due on Tuesday, with the risk leaning toward a downside, likely strengthening expectations for an interest rate cut by the European Central Bank (ECB) later this month.

Recently, Germany’s inflation for September was reported at 1.8% year-on-year, the lowest since 2021, falling below forecasts. Additionally, inflation is easing in France, Italy, and Spain, leading traders to fully price in an October rate cut after ECB President Christine Lagarde indicated that this trend would be considered in the next policy meeting scheduled for October 17.

Traders are also factoring another ECB cut for December, which has prompted a sell-off of dollars as investors believe global inflation is under control, with U.S. rates predicted to have the furthest to decline.

The euro is holding just above $1.11, unable to break the $1.12 barrier, while the yen and yuan have shown more volatility in currency markets. Currently, the yuan remains flat at 7 per dollar, with Chinese markets closed and holidays in Hong Kong and South Korea contributing to lighter trade activity in Asia. The Yen steadied at 143.89 per dollar.

In the U.S., yields fluctuated when Federal Reserve Chair Jerome Powell remarked that the policy committee isn’t rushing to cut rates. However, should the data released on Tuesday and later in the week show softness, expectations might shift.

The U.S. manufacturing ISM has remained in contraction for several months despite general economic stability, heightening focus on the employment index and August job openings data. If weak signals emerge, traders may increase their bets on a 50-basis-point cut from the Fed for November, with current market pricing showing a 36% likelihood of such a cut, down from 53% before Powell’s comments.

Moreover, as Israel’s anticipated ground invasion of Lebanon begins with military operations targeting Hezbollah, oil prices have slightly increased. Asian trade remains muted due to holidays, as rising markets in China pause, leading to a slight contraction in iron ore mining stocks in Australia.

September’s factory activity in Asia showed signs of weakness amid soft Chinese demand and global uncertainty, indicating a difficult outlook ahead.

In Japan, Shigeru Ishiba is poised to be elected as the next prime minister, while promising retail sales data in Australia provided a minor boost to the Australian dollar.

Key Developments for Tuesday:

• Eurozone inflation data
• U.S. job openings, ISM survey