Global Markets React to Economic Uncertainty and Currency Moves | Daily Market Analysis

Key events: 

• New Zealand - Business NZ PMI (Sep)
• China - CPI (MoM) (Sep) 
• China - CPI (YoY) (Sep)
• UK - BoE Gov Bailey Speaks
• USA - Member Harker Speaks
• Eurozone - ECB President Lagarde Speaks

European markets experienced another lackluster session, drifting into negative territory following the release of US Consumer Price Index (CPI) data, which, like the Producer Price Index (PPI) numbers earlier in the week, came in slightly hotter than anticipated, prompting a notable increase in yields.

US markets also closed lower on the same day, with uncertainty reemerging about the extent of potential future rate hikes, and markets beginning to factor in the possibility of another rate increase at the upcoming Federal Reserve meeting in three weeks.

Earlier in the week, yields had started to recede due to safe-haven buying, partly stemming from the shocking events in Israel over the weekend. Several Federal Reserve officials had also indicated that US rate policy might already be restrictive enough, suggesting that rates may not need to rise significantly further.

At present, we find ourselves in a state of uncertainty regarding the potential for further rate hikes, with the US economy still showing resilience, while rate policy struggles to bring inflation back to its target.

In reality, the journey to reach the 2% inflation target may take considerably longer than initially anticipated, and markets are gradually realizing that the path forward may not be a straight line.

This uncertainty is underscored by this morning's Chinese inflation and trade data for September, which once again highlights the ongoing challenges faced by the Chinese economy.

Earlier this week, reports surfaced about a potential $137 billion stimulus package from the Chinese government, providing a boost to markets. Additionally, reports yesterday indicated that the Chinese sovereign wealth fund had been purchasing shares in some of the country's largest banks, a move seemingly aimed at instilling confidence in the financial sector.

The Chinese economy could certainly benefit from assistance, as today's September economic data suggests.

In recent months, there has been little evidence of a substantial uptick in economic activity in China. The sharp deceleration in the recent Caixin manufacturing and services Purchasing Managers' Index (PMI) readings indicates that confidence remains low, and the modest improvement observed in August might have been a one-time occurrence. Import figures have consistently declined throughout this year, underscoring the difficulties facing the Chinese government in stimulating domestic demand.

As European markets prepare to open, they are expected to start on a lower note, influenced by the disappointing Asian session and the weak Chinese economic data released this morning.

Speaking of currencies, the Dollar Index, a widely observed gauge of the US Dollar's strength against a basket of six major currencies, rallied to 106.57, up from 105.75.

Sterling (GBP/USD) weakened, falling to 1.2177 from 1.2277 against the broadly strengthening US Dollar. This drop was exacerbated by disappointing UK Industrial Production data, which showed a decline of -0.7% compared to the forecast of -0.2%.

The Euro also saw a decline, closing at 1.0530, down from 1.0585 the previous day. It experienced some volatility during trading, with an overnight high at 1.0640. Germany's 10-year Bund yield remained unchanged at 4.42%.

Against the Japanese Yen, the US Dollar performed strongly, ending at 149.80, not far from its overnight high of 149.83. Japan's 10-year JGB yield saw a 2-basis point drop to 0.75% (from 0.77%).

As we approach the end of the week, today's economic calendar is relatively light. New Zealand started the day with its Business New Zealand Manufacturing Index, which decreased to 45.3 in September from 46.1 in the previous reading.

China is next on the schedule with its September Consumer Price Index (CPI), Producer Price Index (PPI), and Trade data. China's CPI for September is forecasted to remain steady at 0.3% on a month-to-month basis and increase slightly to 0.2% year-on-year from the previous 0.1% (data provided by ACY Finlogix).

With the earnings season in full swing, the market's focus is now turning to US banks. Investors will be closely watching for results from JPMorgan Chase (NYSE: JPM) due to be released on Friday, as it will likely set the tone for the market.