Mortgage relief lifts China's CSI 300 by more than 8% ahead of the golden week holiday

Overview: The US dollar is narrowly mixed on the last trading day of Q3 24. The Australian dollar, the G10 proxy for China, is leading the major currencies higher and reached its best level since February 2023 (~$0.6940). The yen and Swiss franc continue to trade heavily and are off 0.2%-0.25%. The euro firm and traded above $1.12 for the fifth time since late August but has failed to settle above there once. The soft inflation readings have boosted the chances of an ECB rate cut in October. In the US, the focus is on the labor market, with the monthly employment report on Friday and an East Coast and Gulf dockworkers strike set to start tomorrow. Most emerging market currencies are trading firmer, but South Africa, India, Indonesia, and South Korea softer. The LDP have called for a snap election in Japan for October 27. 

Beijing's cut in existing mortgage rates helped propel Chinese stocks sharply higher. The CSI 300 rallied an 8.5% and is up by more than a quarter in the past five sessions. The Hang Seng advanced by 2.8% for a nearly 16% gain over the past five sessions. The mainland markets are closed until next Tuesday. Of the large bourses in the region, only Australia and Singapore rose. The Nikkei was off around 4.8%. Europe's Stoxx 600 is off 0.65% today giving back Friday's gains plus a little more. US index futures are slightly softer. Benchmark 10-year yields are 2-5 bp higher in Europe and the 10-year US Treasury yield is nearly three basis points high near 3.78%. Gold is softer for the second session. It peaked last week a little above $2685 and is now slightly below $2650. November WTI ran up to about $69.35 before meeting sellers that drove it back to around $68. The low from the second half of last week was just below $67. 

Asia Pacific

Even before new LDP leader Ishida is officially prime minister, he announced a late October snap election. The market saw little chance of a BOJ rate hike this month, and the early election and unexpected sharp drop in industrial output on the heels of a moderation in Tokyo's September CPI seems to seal the fate. Industrial production fell 3.3% in August. The median forecast in Bloomberg's survey was for a 0.5% decline. The outlook for September and October is considerably better. Japan also reported a 0.8% rise in August retail sales., which was a little better than expected. Tomorrow, August employment and the Q3 Tankan Survey are out. Ahead of the Golden Week holiday, China's PMI and the Caixin iteration were released. They were rendered moot by the recent package of measures. Australia's private credit expansion continued at a steady 0.5% monthly pace in August. Retail sales are reported tomorrow, and a 0.4% increase is expected after a flat July.

The dollar posted a bearish outside down day against the yen ahead of the weekend. It has initially climbed to a two-week high near JPY145.50 on the ideas that Takaichi was favored to win the LDP leadership contest and the firmer US yields. Takaichi did not win, and US rates fell, and the greenback dropped to nearly JPY142. The losses were extended to JPY141.65 today. With the help of firmer US rates, the dollar has recovered to around JPY142.60 in the European morning. The JPY143 area may cap it. Perhaps not fully appreciated, the yen has emerged as the most volatile (3-month implied) of the G10 currencies (11.7%). China's stimulus provided the impetus to take the Australian dollar above $0.6900 for the first time since March 2023. It reached $0.6940 today. Since the September 11 US CPI report, the Aussie has rallied nearly 5%. The momentum indicators are stretched. A close below $0.6870 may be the first sign the market is tired. The greenback depreciated by about 3.9% against the offshore yuan in the 13 weeks since the end of Q2. It has fallen in all but four weeks. When the mainland markets are closed for an extended period, the offshore yuan tends to trade quietly. Market participants chose to be cautious. Today, ahead of the holiday, the dollar has largely traded in the pre-weekend range (~CNH6.97-CNH7.0050). The PBOC set the dollar's reference rate at CNY7.0074 (CNY (7.0110 Friday). 

Europe

The market has warmed up to the idea that the ECB could cut rates on October 17 meeting. A week ago, the swaps market had it as a 40% probability and now it is near 80%. The low French and Spanish September CPI readings reported before the weekend encouraged a move that was already underway, perhaps encouraged by still-elevated speculation of another 50 bp move by the Federal Reserve. On an EU-harmonized basis, France's CPI fell to 1.5% from 2.2% and Spain's fell to 1.7% from 2.4%. German states are reporting today, and the harmonized measure is also seen falling below 2%. The eurozone aggregate estimate is due tomorrow and expected to be flat, which would bring it to 1.9% from 2.2%. The other parties are determined to prevent the far-right Freedom Party from governing Austria and the election results are having little impact on Austrian bonds or stocks today. Lastly, Q2 UK GDP was revised to 0.5% from 0.6%. Weaker government spending and the deterioration in the current account was not fully offset by the upward revision in business investment. Still, the Q2 news had negligible impact as Q3 ends today. 

Since late August, the euro has pushed above $1.12 on four occasions, including before the weekend, but has failed to sustain a close above it. Today is the fifth attempt. The euro reached almost $1.1210 in nearly European turnover. Options for a billion euros expires at $1.12 today. Also, the euro has not closed below $1.11 for two weeks. The widening of the US two-year premium over Germany in recent sessions and the oversold dollar more broadly, makes us inclined to see continued near-term sideways trading. Sterling set a marginal new high near $1.3435 ahead of the weekend but settled closer to $1.3375. It recovered to nearly $1.3425 today. The momentum maybe stalling after rallying four-and-a-third cents off the September 11 low, but the consolidative price action still looks constructive. A break of the $1.3300 area would suggest a near-term top has been forged. The euro may also be forming a base against sterling after approached GBP0.8300 last week, its lowest level since April 2022. Resurfacing GBP0.8375 could signal the upside correction.

America

Without talks today, the East Coast and Gulf dockworkers strike is set to begin tomorrow. Hopes of redirecting traffic to Canada has been blocked by the Montreal dockworkers also on strike. Some reports estimate that for every day the ports are closed will take as much as five days to clear the congestion after the strike. The market's attention shift from US prices (moderating) to the US labor market. The highlight is Friday's nonfarm payroll report. The Federal Reserve has underscored the importance of the full employment mandate as its confidence in achieving the price stability mandate has risen. The median Fed projection sees the 4.2% current unemployment rate as the long-term trend (full employment) but sees its rising to 4.4% by the end of this year and staying there next year. Given the non-linear nature of unemployment, this has been questioned. Yet, we note that it dovetails with the results of Bloomberg's monthly survey. The JOLTS report and ADP private sector job estimate pose headline risk but disappointing jobs growth and unemployment rate that will have the biggest impact. That said, the markets are already fully discounting 75 bp of Fed cuts in Q4's two meetings, and at this juncture, an unexpectedly poor report could spur speculation 100 bp instead. We had thought that the upward revision in the growth profile and a reduced gap between GDP and GDI, with a commensurate rise in US savings would have tempered some of the negativity, but alas, the two-year yield is pinned near its 3.50% low and the Fed funds imply another 200 bp of cuts by the mid-2025. Canada's economic diary is light this week, with the PMI and IVEY surveys providing the highlights. Mexico's markets are closed tomorrow when Sheinbaum is inaugurated.

The Canadian dollar is the only G10 currency that has been unable to rise against the US dollar this month. It had turned up briefly in the first part of last week before retreating. The greenback fell to a seven-month low near CAD1.3420 in the middle of last week before finishing the week close to CAD1.3515. A narrow range between CAD1.3500 and CAD1.3525 has been traced today. The CAD1.3535-60 area may offer nearby resistance, and above there CAD1.36 beckons. The Mexican peso also looks vulnerable, but it is trading quietly so far today (~MXN19.62-MXN19.74). Ahead of the weekend, the dollar posted its highest settlement since September 11. Sheinbaum looks to have a short honeymoon in the markets. A move above MXN19.75 could spur a retest on MXN20.00, and the month's high (~MXN20.15). Lastly, note that Colombia is expected to deliver its fifth half-point rate cut today in the cycle that began last December. The overnight target will be at 10.25% at the end of the day.