On September 8, 2023, stocks rose while Treasury yields remained lower following last week's disappointing U.S. labor data, which has significantly increased the likelihood of an interest rate cut by the Federal Reserve this month. Investors are gearing up for a week filled with political developments, key economic data, and central bank activities that could influence market trends.
The first major political event of the week unfolded in Japan, where the resignation of Prime Minister Shigeru Ishiba sent shockwaves through the market. In response, the yen and longer-dated bonds dropped, while stocks experienced an uptick. Traders are now speculating on the potential successor to Ishiba, with particular interest in Sanae Takaichi, a veteran of the Liberal Democratic Party. Takaichi has publicly criticized the Bank of Japan's previous interest rate hikes, raising questions about future monetary policy.
In France, the political landscape is equally unstable, with incumbent Prime Minister Francois Bayrou facing a confidence vote today that he is anticipated to lose. Should Bayrou's position falter, uncertainty looms over whether President Emmanuel Macron will appoint a new prime minister or call for fresh parliamentary elections. This unpredictability is keeping French and broader European assets in a state of flux, particularly with a series of upcoming reviews on French debt ratings that investors are closely monitoring.
The political instability in both France and Japan is contributing to a weakened performance of the dollar. Following last Friday's lackluster jobs data, the markets are fully pricing in a 25 basis point rate cut from the Fed later this month, with a minor probability of a 50 basis point reduction. According to Paul Mackel, global head of FX research at HSBC, these developments suggest a potential shift in U.S. employment conditions from cooling to deteriorating, raising the question of whether the Fed should accelerate its rate-cutting strategy.
As a result, the dollar reached a six-week low against a basket of currencies on Friday. On Monday, it showed varied performance—down significantly against the Swiss franc and Antipodean currencies, while the euro managed a slight 0.1% increase to $1.1731. The dollar also edged higher against the yen, trading at 147.6 yen.
After a sharp decline on Friday, U.S. Treasury yields steadied, with the benchmark 10-year yield slightly softer at 4.08%. The rate-sensitive two-year yield stood at 3.50%. Investors are keenly awaiting the U.S. CPI data scheduled for release on Wednesday, as it will be the last significant data point before the Fed's upcoming meeting. A strong CPI print could temper expectations for an aggressive rate cut.
Meanwhile, the European Central Bank is set to meet on Thursday, with expectations indicating a steady interest rate for the second consecutive meeting.
In the commodities market, gold continues its impressive rally, reaching an all-time high of $3,616 per ounce. The precious metal has increased by 37% this year, following a 27% rise in 2024. Additionally, oil prices are climbing as the OPEC+ group announced over the weekend that it would slow output increases starting in October due to anticipated weaker global demand. Both Brent crude and U.S. West Texas Intermediate crude saw a rise of 1.6% each.
This week’s developments are crucial for investors as they navigate the complexities of political changes and economic indicators that could shape market directions.
