Markets React to Fed's Dovish Tone and Economic Developments | Daily Market Analysis

Key events:

• USA - PPI (MoM) (Sep)
• USA - FOMC Meeting Minutes

On Tuesday, the Dow Jones closed with gains, primarily influenced by fresh comments from the Federal Reserve suggesting a potential pause in rate hikes next month. This development helped keep Treasury yields in check.

The Dow Jones Industrial Average experienced a 0.6% increase, equivalent to a rise of 185 points, while the Nasdaq saw a 0.8% gain, and the S&P 500 climbed by 0.7%.

Raphel Bostic, President of the Atlanta Federal Reserve, further fueled expectations that the Fed would maintain the current interest rates next month. He pointed out that many of the 11 rate hikes implemented since March 2022 have not yet fully impacted the economy. According to Bostic, there might not be a need for further rate hikes to address the issue of high inflation and bring it in line with the Fed's 2% target.

Minneapolis Fed President Neel Kashkari echoed Bostic's sentiments, suggesting that the recent increase in long-term Treasury yields, which has tightened financial conditions, could potentially assist the Fed in its efforts to combat inflation.

Meanwhile, the yield curve of Treasury bonds continued to normalize, dispelling concerns of an impending recession. The gap between the 2-year and 10-year Treasury rates narrowed to -29 basis points, marking its lowest level since March and a significant improvement from the summer's trough of -106 bps.

On Wednesday, the US dollar mostly traded within a defined range, yet it continued to be influenced by the dovish remarks from Federal Reserve officials. Traders were eagerly anticipating the release of the central bank's policy meeting minutes later in the day, hoping to gain more insights into its stance on interest rates.

Several Federal Reserve officials have recently indicated that there might not be a strong need for further tightening of monetary policy as initially anticipated. As a result, the US dollar found itself near a two-week low in relation to a basket of other currencies, with its value standing at 105.80.

Despite Morgan Stanley reiterating its confidence in Microsoft Corporation (NASDAQ: MSFT) and recognizing it as a top pick due to its strength in artificial intelligence, cybersecurity, and cloud businesses, Microsoft's stock saw a decline in value.

On the other hand, Boeing Co (NYSE: BA) experienced a more than 3% increase in its stock price, even though the company reported a decline in third-quarter deliveries of new airline jets. The decrease in deliveries was attributed to ongoing production issues with its 737 MAX jets. Boeing delivered 105 airplanes in the third quarter, down from 112 jets in the same period the previous year.

Additionally, Boeing (NYSE: BA) announced the delivery of 1,000 smart bombs to Israel as part of the latter's increased measures against Hamas in a separate statement.

In Tuesday's trading session, the NZD/USD pair encountered modest support, establishing a daily floor near 0.5998. However, the bullish momentum remains constrained, and the New Zealand Dollar is grappling with resistance around the 0.6040 mark against the US Dollar.

Economic data for the Kiwi is notably sparse and low-impact this week. Still, New Zealand currency traders should keep an eye on the New Zealand Business NZ Purchasing Manager Index (PMI) for September, which previously stood at a contracting 46.1. This data is scheduled for release at 21:30 GMT on Thursday.

On Wednesday, the focus shifts to the United States, with the release of the Producer Price Index (PPI) figures for September. The annualized reading is anticipated to edge up from 2.2% to 2.3%. Additionally, Thursday will bring the Consumer Price Index (CPI) for the same period, which is forecasted to slightly retreat to 4.1% compared to the previous figure of 4.3%.

Meanwhile, the Canadian Dollar is trading relatively flat against the USD in Tuesday's market session, with minor fluctuations in the upper and lower ranges. The pair initially dipped to a low of 1.3569 before rebounding to 1.3617. Currently, the USD/CAD pair is hovering around the middle, testing levels near 1.3600.

Canada's economic calendar for the trading week is light, leaving the CAD susceptible to shifts in US Dollar sentiment and broader market conditions.

Notably, investor attention remains focused on the ongoing escalation in the Gaza Strip, which stems from Israel's response to recent Hamas rocket attacks over the weekend. There is heightened concern about potential geopolitical repercussions and spillover effects in nearby Middle East countries.

The market's attention has now shifted to the impending release of the minutes from the Fed's September policy meeting, scheduled for later on Wednesday. These minutes could provide additional clarity on the central bank's perspective regarding future interest rates.