It was a virtual holiday in the US today as the US debt market was closed to mark Columbus Day. Therefore, there were no government-issued releases today. However, the US stock market was open. Additionally, bond futures markets were open and their prices were rising (lower yields).
The weekend’s geopolitical risk from Hamas’ bloody terrorist attacks in Israel, which left over 1,000 dead and thousands injured, sent US stocks lower at the open and led to a flight to the US dollar. However, stocks began to recover, yields fell (according to bond futures), and the USD reversed course during the day.
The Dow fell -153 points at the session low but closed at just under 200 points or 0.59%. The Nasdaq index also fell -153 points but closed higher by 52.89 points or 0.39%. Looking at the major US indices, the S&P rose 0.63%.
Look at the FX market: USD was one of the strongest major currencies at the start of the New York session, but is closing as one of the weakest currencies (only slightly outperformed by the EUR). The NZD is the strongest of the majors, followed by the AUD.
Some conciliatory comments from Fed officials following strong employment gains on Friday helped push the dollar lower.
Although Dallas Fed President Lorie Logan stressed the need for restrictive financial conditions to combat inflation. She also noted the role of higher term premiums in driving up long-term interest rates and suggested that if that was a primary cause, the Fed might not need to raise interest rates as much. But she warned that further Fed action may be needed if a stronger economy drives up long-term interest rates. She stressed that inflation control and price stability were her main concerns and while there was progress, caution remained necessary as the path to the 2% inflation target remained uncertain. Logan highlighted the strong job market and economic performance, but also monitors the Chinese downturn and financial conditions. She believes the economy is adjusting quickly to monetary policy and expects a potentially higher long-term neutral interest rate.
Meanwhile, Vice President Jefferson emphasized the importance of cautious monetary policy adjustments to avoid excessive or insufficient tightening. He is not yet convinced that rate hikes have tightened sufficiently, but is also aware of the lagged effects of past rate hikes. Jefferson is monitoring the rise in long-term yields and is focused on both continued high inflation and the possibility of a moderation in core PCE prices as the labor market balances out. He acknowledged a tight labor market, inflation risks from a strong economy and downside risks from possible slowdowns in China and Europe. Jefferson described current policies as restrictive and emphasized the need for a flexible response to economic changes. He sought policies that would support job growth while steering inflation toward the 2 percent target.
Notably, the market tightened and expectations for a rate hike in November fell from over 30% on Friday to around 14% today. In addition, today they postponed a cut in 2024 from July to June.
The US CPI will be released later this week and will be important for the Fed going forward.
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