Pre-market open: Geopolitical jitters temporarily yield to US economic exceptionalism

Last week, equity markets scraped out some modest gains despite early jitters fueled by geopolitical tensions, all thanks to a stronger-than-expected U.S. payrolls report. Sure, the headline job numbers looked fantastic, but the big question remains: Are rate cuts coming quickly enough to soften the blow from the Fed's tightening spree and avoid a classic recession? Most economists seem to think so, and the bond markets finally agree. The challenge, though, is that policy shifts don’t happen overnight. By the time the economic data reflects real damage, central banks might find themselves behind the curve, scrambling to course-correct when it’s already too late.

So, what’s the market pricing telling us right now? Rate cuts are still on the table, but expectations have cooled slightly after that blockbuster September jobs report. Markets have settled into a steady rhythm, pricing in 25 basis point cuts through the spring. Meanwhile, inflation expectations remain surprisingly well-anchored. That’s a sweet spot for markets—a true Goldilocks scenario. Core inflation is gradually easing toward 2%, and policymakers seem to have moved on from their inflation obsession.

Even inflation expectations, which are notoriously tricky to tame, are looking pretty chill. Five-year implied inflation expectations have nudged up, but they’re still at just 2.1%, while five-year forward expectations sit comfortably at 2.3%. In short, the market doesn’t seem too worried about another inflation flare-up right now.

Equity investors are shifting gears too, focusing more on traditional cyclical sectors like industrials, materials, financials, and consumer discretionary—rather than the usual tech darlings. Utilities, being rate-sensitive, have also had their moment in the sun. With the Fed in insurance-cut mode, the market is scaling back the recession fears that had dominated rate pricing. And, honestly, it won’t take much more from the macro side to push the S&P 500 toward 6,000. Heck, throw in some well-documented seasonal flows, and 6,500 might just be a nice little holiday bonus for index investors to ring in the new year.

But there’s a potential wrench in the works—the commodity market. Any real escalation in the Middle East that disrupts oil infrastructure could throw everything into chaos, sending inflation roaring back. If Israel hits Iran’s oil or nuclear sites, and the U.S. and U.K. get dragged in, all bets are off.

Now that Golden Week has come and gone, Thailand is waiting to tally up the economic windfall from what was expected to be a significant boost. The flood of 183,000 Chinese tourists was projected to pump a hefty 5.1 billion Thai Baht into the economy.

On the mainland, the festive mood led to increased occupancy at smaller to medium-sized hotel venues based on the surge in last-minute bookings. Optimism is still running high, and it looks like the anticipated consumer spending bounce might have been delivered. With locals feeling more confident thanks to government support and a wave of e-vouchers, mainland economists are now busy crunching the numbers, with investors hoping for a solid economic lift.

Investors are hoping that Golden Week has sparked a renewed sense of confidence in China's service sector. But let’s not kid ourselves—the real game-changer for the long term depends on whether Beijing rolls out a massive fiscal stimulus. The fate of China’s mega-rally could very well hinge on the government pulling the trigger on a CNY 5-10 trillion special fiscal bond issuance. It’s not happening this week, but all eyes are on the signals and optics. Bottom line? The party is mulling a "whatever it takes" fiscal approach, and if you’re riding this China rally, you'd better hope that fiscal bazooka drops sooner rather than later.

Looking ahead to the U.S. markets, we’re at one of those pivotal moments where inflation and employment indicators are giving mixed signals, particularly with government hiring ramping up ahead of the election. Jobs are jobs—until the layoffs start, that is. The upcoming CPI and PPI reports will be critical. While month-over-month inflation figures should stay tame, the year-over-year PPI might come in a bit hot, thanks to some ugly base effects. With all these mixed signals swirling, one thing’s clear: the ride’s not over, and no one knows where this rollercoaster is heading next.