Asia open: China stimulus in focus: “Go big or go home“

An air of caution may cast a shadow over Asian stocks on Tuesday as investors shake off a lacklustre U.S. session and brace themselves for two significant catalysts—Australia's interest rate decision and remarks from Bank of Japan (BOJ) Governor Kazuo Ueda.

But hold on, Wall Street hasn’t thrown in the towel yet. Those willowy gains from Monday’s session were enough to keep the S&P 500 within striking distance of last week’s record high, while the Dow peaked at 42,190. Hence, the momentum from last week’s Fed move hasn’t yet lost its steam. The bull case for risky assets may have gotten a shot in the arm thanks to Chicago Fed President Austan Goolsbee, who hinted the Fed’s policy rate is still "hundreds" of basis points above neutral. Translation? "A lot of cuts" are coming next year, folks.

This comes on the heels of a Friday surprise from Fed Governor Christopher Waller, who did a 180, admitting inflation is cooling off way faster than he’d anticipated, with August’s PCE inflation potentially printing softer than expected.

But here’s the kicker: there’s always that thin line between rate cuts igniting risk appetite and the unsettling question of why policy is being loosened so quickly. Cue the mind games: “What does the Fed know that we don’t?” This psychological tug-of-war means every economic stat and labour market data point between now and the Fed's next meeting will be dissected like a high-stakes thriller.

Meanwhile, all eyes turn to the BOJ—the only major central bank brave enough to hike rates. Investors are eagerly awaiting Governor Ueda’s speech on Tuesday to decipher any clues on the pace and scope of tightening. The BOJ kept rates steady last Friday and isn’t exactly rushing to turn the dial again anytime soon.

Now, let's not forget the plot twist from China. In a surprise move, the People's Bank of China (PBOC) injected 14-day liquidity into the system for the first time in months—and at a lower rate to boot. The real question is: could this be the teaser for a bigger stimulus package? Speculation is swirling that Beijing might roll out some hefty support measures at today’s press conference featuring the PBOC and two other agencies. But here's the thing—go big or go home. Investors will need serious convincing that China’s efforts are robust enough to stave off deflation and reignite growth. It’s high-stakes, all or nothing.

Oil Markets

Crude oil prices took a dip as the geopolitical heat dialled down a notch. After Israel and Iran-backed Hezbollah traded rockets, Iranian President Masoud Pezeshkian stepped in with a cooler tone, signalling his country’s readiness to de-escalate—provided the other side follows suit. This move threw a wet blanket on oil market jitters that had been building over fears Iran, a heavyweight OPEC producer, might get pulled into a more significant conflict. For now, Pezeshkian seems more interested in keeping the peace than firing things up.

But geopolitical tensions aren’t the only thing traders are sweating over. Mother Nature is stirring the pot too, with the U.S. Gulf Coast in the crosshairs of a potential hurricane later this week. As a patch of rough weather in the Atlantic tightens up, Shell has already hit pause on production at its Appomattox and Stones oil fields. Still, the market seems to be keeping one eye on the storm and the other on the bigger economic picture.

And speaking of the economy, China’s slowing growth remains the elephant in the room. Beijing looks ready to pull some levers, with reports suggesting a fresh round of stimulus is on the way to keep things afloat. The People’s Bank of China (PBoC) already cut its 14-day reverse repurchase rate on Monday, and chatter is growing that a more substantial stimulus package could be just around the corner.

In short, the oil market’s caught in a whirlwind of geopolitical calm, hurricane hype, and economic uncertainty—a tricky cocktail that’s keeping prices wobbling like a tightrope walker. Buckle up, because this ride isn’t over yet!

 

Global markets inched higher on Monday as investors sifted through the latest musings from Federal Reserve policymakers. At the same time, the euro took a tumble against the dollar after the eurozone’s business activity data fell flat. It’s a fresh look at the global economy's health—and not everyone’s feeling great.

In the U.S., services are still carrying the torch, while manufacturing? Well, it’s limping along, but not enough to spook anyone. It’s the classic tale of a two-speed economy: services flexing their muscles while manufacturing keeps shrinking in the background.

But Europe? That’s where things get ugly. Monthly PMI reports revealed a bigger-than-expected contraction in major economies, sending investors rushing for the safety of bonds and the yen as the euro felt a bit of pain. However, broader US dollar sell-offs tend to be fleeting in an aggressive US rate-cut environment; hence, the EURUSD is still trading above 1.1100.

By afternoon trading, U.S. stock indexes were mixed, which isn’t surprising after the record highs hit last week post-Fed's jumbo rate cut. Investors have been riding high on the soft-landing narrative by Chair Jerome Powell—50 basis points with nary a spooky heart palpitation from equity markets. But after last week’s adrenaline rush, don’t be shocked if the rally hits a speed bump or takes a breather.

Fed policymakers were in the spotlight as well. Minneapolis Fed President Neel Kashkari was all in, calling the half-point cut the “right decision,” while Chicago Fed President Austan Goolsbee hinted there might be “many more rate cuts” to come over the next year. Meanwhile, Atlanta Fed President Raphael Bostic stuck to the script, suggesting that inflation and unemployment are nearing “normal” levels.

The Fed’s key message? “We can’t afford to be behind the curve.” And, for now, they’re sticking the landing. So far, so good!

And so the debate rages on—50 or 25 basis points? Markets are torn, with traders pricing in 75bps of total easing by the end of the year.

Counterintuitively, U.S. 10-year Treasury yields ticked higher as bond investors dialled back their near-term recession fears. Meanwhile, a whiff of reflation started to seep into the commodity markets, adding a twist to the bond and currency market narrative.

One of the market’s favourite FX barometers for gauging the global economic cycle—EUR/AUD—is heading lower, which perfectly lines up with a reflationary environment and a steeper U.S. yield curve. Adding fuel to the fire, today’s action on the Australian and Chinese fronts is worth watching. The Reserve Bank of Australia is expected to stick to its semi-hawkish guns, positioning itself as the reluctant G10 rate cutter. Meanwhile, there's speculation that China could roll out domestic support measures during today’s press conference featuring the People's Bank of China and two other agencies.

EUR/AUD already retested recent lows overnight( 1.6250), and if the stars align—i.e., a US soft landing materializes and China delivers big—this pair could be eyeing a drop toward the 1.60 area in the weeks and months ahead.

That said, the jump in 10-year yields after a Fed cut isn’t anything unusual—they typically spike before drifting back down, often to levels lower than where they started when the Fed first cut rates. But to push both yields and the U.S. dollar lower, we’re going to need something more—likely in the form of a weak employment report.

For bond bulls and dollar bears, let’s not beat around the bush—GDP, retail sales, and the usual economic suspects are fine and dandy, but are they the real game-changers here? It’s all about those payroll numbers. Traders are watching the magic number 150,000—the so-called "replacement level." Once the job count dips below that mark (and heads up, we’re already there), unemployment starts creeping up like an unwelcome guest at the party.

Here’s where it gets juicy: four of the last five payroll reports have been flirting with that threshold. So, the million-dollar question is—how low does this number need to drop before the 10-year yield and the US dollar dramatically turn lower? A negative print would probably be the market equivalent of a mic drop. But if we see numbers in the 50k to 100k range, it could still set off alarm bells loud enough to send traders scrambling. And trust me, in this hypersensitive market, even a slight wobble in the jobs data could send a ripple effect through everything from yields to equities.

The bottom line is that payrolls are the show's star, and we’re just waiting to see if they hit us with a plot twist or another episode of "meh."