Investors read Fed tea leaves, shrug off China stimulus

NEW YORK – Wall Street got back on track Tuesday, encouraged that the Fed seems confident enough in the US growth picture to ease up on the easing, but investors have been reticent ahead of the release of minutes from the September FOMC where officials took the most dovish possible policy turn to ensure the US jobs machine keeps humming.

By the time New York opened, markets weren’t looking too impressed with China’s economic jawboning after its return from Golden Week holiday. The yuan took a spill although it had brushed itself off a bit by the time Tuesday trading wrapped up.

Beijing said it was “fully confident” of achieving its full-year growth target but refrained from introducing stronger fiscal steps, disappointing investors who had banked on more support from policymakers to get the economy back on track.

While China shares initially rallied to two-year highs after the holiday they lost steam after the state planner did not provide details to sustain market optimism. Hong Kong shares slumped as investors also walked back some of the stimulus excitement.

London-based hedge fund giant Winton has lost more than 8% on its China strategy, since Sept. 20, wiping out all gains for this year, according to two investors and a performance record.

On Wednesday, the record from September’s Fed meeting will reveal the discussion about what looked at the time like a deteriorating labor market, until the eye-popping September payrolls report on Friday put those concerns to rest and unchained animal spirits for two of three subsequent US trading sessions.

Traders were 88% confident that November’s FOMC would bring a 25-basis point cut, hedged by a 12% probability that the Fed would hold rates steady. Fed funds futures still lean toward 50 bps of easing through year-end.

US markets were also still focused on the growing risk of a Middle East conflagration as Israel continued to step up its military incursion into Lebanon to combat Hezbollah, while continuing its war with Hamas in Gaza.

That did not stop the S&P 500 from rebounding 1%, while the Nasdaq advanced almost 1.5% as the risk-off impulse dissipated.

Forex trading in US time zones was subdued, with traders keeping powder dry for the release of September CPI on Thursday, the most important indicator of the week, even as Fed confidence that inflation is nearing their 2% target seems to have turned its policy discussion more squarely on employment.

The dollar eked out a 0.05% gain vs. the yen and showed a 0.67% rise against the yuan late Tuesday. The 10-year Treasury yield held above 4% for a second day.

Here are key developments that could provide more direction to markets on Wednesday:

– Taiwan CPI (Sept)

– Reserve Bank of India meeting

– Reserve Bank of New Zealand meeting

– Minutes of Federal Open Market Committee meeting (Sept)