Measured Powell, China breather set scene for Q4 open

Investors in Asia kick off the new quarter on Tuesday catching their breath from an astonishing end to the third quarter that saw Chinese stocks clock their best day since 2008 and Japanese stocks register one of their biggest falls in years.

On top of that, Fed Chair Jerome Powell on Monday dampened some of the more fervent hopes for future rate cuts, saying his base case is for a further 50 basis points easing this year and that the central bank will reach its neutral rate “over time.”

This pushed Treasury bond yields higher – most notably at the short end of the curve where the two-year yield leaped 10 basis points – and traders shifted expectations for November’s Fed meeting closer to a 25 bps cut from 50.

Tuesday’s economic calendar is packed with top-tier releases including Japanese unemployment, Indonesian inflation, South Korean trade, and a raft of purchasing managers index reports from across the Asia and Pacific region.

Of course, Powell’s remarks weren’t hawkish. But they were a reminder that perhaps some of the rate expectations built into market pricing had gotten a little extreme.

Wall Street closed in the green on Monday, rounding off a solid quarter that saw the S&P 500 reach multiple new peaks and increased rotation out of Big Tech into beaten down sectors and small cap stocks.

Investors in Asia on Tuesday will digest this and the remarkable market moves in the continent’s two biggest economies the day before.

Chinese markets are now closed until Tuesday next week as the country celebrates Golden Week. The market break could not have been better timed.

Monday’s 8% surge means Chinese stocks have risen by around a quarter since Sept. 23, when Beijing unveiled the first of a series of stimulus measures to support the economy and markets. A 25% increase, in a week, is nothing less than extraordinary.

Blackrock, the world’s largest asset manager, has raised its tactical asset allocation for China to “modestly overweight” from “neutral.”

Unsurprisingly, the equity market’s historic rebound is pouring fuel on the burning question of whether China’s stimulus will revive the economy. On that score, far more uncertainty abounds.

A fundamental issue is that lower borrowing costs and more ample market liquidity won’t increase consumer demand in an economy dealing with a monumental property sector bust, the deleveraging that goes with that, and deflation.

Japanese stocks, meanwhile, will be looking to bounce back from a near-5% slump on Monday, as investors gear up for an Oct. 27 election. That was the biggest fall since the Aug. 5 volatility shock, and the third biggest since the early days of the COVID-19 pandemic in March 2020.

The yen’s slide back towards 144.00 per dollar should help.

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

– Japan unemployment (August)

– Indonesia inflation (August)

– PMIs – Australia, India, and others (September)

(Reporting by Jamie McGeever; Editing by Bill Berkrot)

Assets in actively managed ETFs top USD 1 trillion worldwide

Assets in actively managed exchange-traded funds (ETFs) worldwide hit a record USD 1 trillion at the end of August, according to data provider ETFGI, boosted by easier regulations and a wave of product innovation.

Active ETFs seek to outperform the indexes they are benchmarked to, including the S&P 500, the Nasdaq 100 and the Russell 1000 Growth Index. Bear Stearns launched the first active ETF in 2008.

While they make up just 7% of all global ETFs, active ETFs have accounted for 30% of all inflows into the funds as a whole for the last several years, Matthew Bartolini, head of SPDR Americas Research at State Street Research, told Reuters in the latest episode of Inside ETFs.

A key growth catalyst, analysts said, was the 2019 regulation popularly known as the “ETF rule,” which streamlined the complex process of winning approval for active ETFs from the US Securities and Exchange Commission. Assets in the active ETF category have grown about 10-fold since 2019, according to data from ETF.com.

Growth has continued this year. As of Aug. 31, active ETF assets soared 42%, data from ETFGI showed.

The more relaxed regulations have also fueled innovation, Bartolini said, encouraging issuers to take novel approaches to products as they vie for investor dollars.

Active ETFs run the gamut from the plain vanilla, such as the BlackRock Large Cap Value ETF to more niche offerings, like the AdvisorShares Vice ETF, which invests in shares of companies involved in the alcohol, tobacco and cannabis industries.

“These regulatory rule changes have actually accelerated some of the more novel approaches that ETF issuers can bring to the marketplace,” Bartolini said.

Active ETFs include products that have been wildly volatile, such as Ark Innovation ETF ARKK.P, which soared 152% in 2020, only to slump 23% the following year. So far in 2024, it has lost 9.74%, compared with a 20% gain in the S&P 500. Some can also magnify risk, such as leveraged ETFs tied to the performance of individual stocks like Nvidia.

Nor are all active ETF issuers faring well.

The 10 largest issuers accounted for 75% of active ETF assets, according to a Morningstar report from earlier this year. The bottom half of active equity ETFs have only 3% of all the group’s assets.

“ETFs that repackage old-fashioned stock-picking have struggled to attract assets,” said Jack Shannon, manager research analyst at Morningstar, in a report published on Tuesday.

Tim Huver, senior vice president of ETF Servicing at Brown Brothers Harriman, said active ETFs may require investors to do more due diligence. Nonetheless, he believes the category has reached a turning point.

A Brown Brothers survey found that more than 90% of ETF investors intended to increase their allocation to active ETFs, Huver said.

“I think the second trillion is going to arrive much more rapidly than it took us to get to the first trillion,” Huver said.

(Reporting by Suzanne McGee; Editing by Ira Iosebashvili and Leslie Adler)

Rate cuts set gold on track for best quarter in eight years

Gold prices were heading for their best quarter in more than eight years on Friday, having hit a series of record highs in recent sessions as the start of US monetary easing boosted the appeal of non-yielding bullion.

Spot gold was down 1% at USD 2,643.88 per ounce by 1742 GMT after scaling all-time highs for four consecutive sessions. The market hit a historic USD 2,685.42 on Thursday.

US gold futures settled 0.9% lower at USD 2,668.1. The precious metal, a traditional hedge against geopolitical and economic uncertainty, has gained around 14% this quarter, its strongest performance since the first quarter of 2016 and is up around 28% this year, the most in 14 years.

With bets on more rate cuts in future after last week’s half-percentage-point cut by the Federal Reserve, speculative demand for the metal has driven gold to “oversold” technical levels. Even so, some banks expect prices could rise towards USD 3,000.

“USD 3,000 per ounce levels this year are quite possible. There’s a lot of things out there that could throw gas on the market,” said Phillip Streible, chief market strategist at Blue Line Futures.

“You could see a breakdown in Middle East peace talks, the labour market deterioration could continue, Fed could cut rates by another 50 bps, and China could add more stimulus,” these factors will support the gold market, Streible added.

The rally also damaged physical demand in top consumers – China and India – where some were cashing in on their holdings instead of buying this week.

Gold exchange-traded funds (ETFs) that are backed by the physical metal, a key pillar of demand, saw modest net inflows last week and are yet to fully contribute to the rally, though analysts expect more activity from ETFs in coming months.

“Speculation, especially in US futures, has been driving this rally, but … for prices to hold or climb further, we need stronger Western investor interest. Modest ETF inflows are a good start, but with economic uncertainty still on the horizon,” said John Reade, senior market strategist at the World Gold Council.

Silver prices surged, benefiting from a spillover impact from gold, though some analysts warn that the rally may fade.

(Reporting by Anjana Anil, Anushree Mukherjee, Polina Devitt, Swati Verma, and Sherin Varghese; Editing by Tasim Zahid)

Dollar weakens after inflation data, Yen surges on Ishiba win

The dollar fell on Friday after a reading of US inflation signaled price pressures continue to ebb, while the yen strengthened against the greenback after Shigeru Ishiba, seen as an interest rate hawk, was set to become Japan’s next prime minister.

The US personal consumption expenditures (PCE) price index rose 0.1% in August, matching expectations of economists polled by Reuters, after an unrevised 0.2% gain in July. In the 12 months through August, the PCE price index increased 2.2% after rising 2.5% in July.

In addition, consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.2% last month after an unrevised 0.5% gain in July. The data was slightly below the 0.3% estimate but indicated the economy still maintained some momentum in the third quarter.

The Federal Reserve has recently signaled a shift in focus away from inflation and towards keeping the labor market healthy, but delivered a larger-than-usual interest rate cut of 50 basis points (bps) last week.

“(Fed Chair) Powell can breathe a little sigh of relief,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

“After pushing for a 50 bps cut instead of a more conventional 25 bps cut the personal income and spending data so far vindicates that decision.”

The dollar index, which measures the greenback against a basket of currencies, including the yen and the euro, was down 0.17% at 100.43 after falling to 100.15, its lowest since July 20, 2023, with the euro off 0.14% at USD 1.116.

The dollar is down about 0.2% for the week, on pace for its fourth straight weekly decline and ninth in the last 10. The euro was slightly lower for the week.

Markets are fully pricing in a cut of at least 25 basis points at the Fed’s November meeting, with expectations for another upsized 50 basis point cut now up to 56.7% after the data, according to CME’s FedWatch Tool, from 49.9% before the release.

The yen strengthened after Japan’s Ishiba won the leadership contest of the country’s ruling Liberal Democratic Party in a narrow victory.

Ishiba, a former defense minister, is a critic of past monetary stimulus and told Reuters the central bank was “on the right policy track” with rate hikes thus far.

Markets had been largely expecting a win for hardline nationalist Sanae Takaichi, a vocal opponent of further interest rate hikes, pricing in loose monetary and fiscal policies and a weaker yen over the past week.

The Japanese yen was 1.88% stronger at 142.12 per dollar after strengthening as far as 142.09, on track for its biggest daily percentage gain since Aug. 2. For the week, the dollar is down 1.25% against the yen, poised for its third weekly decline in four.

The euro fell 1.95% to 158.67 against the Japanese currency.

European data showed inflation in France and Spain rose less than expected, boosting expectations for an October rate cut from the European Central Bank to more than 90%.

China, meanwhile, launched another round of stimulus measures on Friday, as the country’s central bank lowered interest rates and injected liquidity into the banking system as it attempts to bring economic growth back towards this year’s target of about 5%.

The dollar strengthened 0.11% to 6.979 versus the offshore Chinese yuan.

Sterling declined 0.3% to USD 1.3375 and is up more than about 0.4% on the week, poised for a second straight weekly advance.

(Reporting by Chuck Mikolajczak; Editing by Kirsten Donovan and Aurora Ellis)

China stimulus, Japan politics dominate Q3 end

Investors in Asia go into the last trading day of the quarter still riding high on the double dose of stimulus administered earlier in the month by the US Federal Reserve and now by China.

In the latest move, the People’s Bank of China on Sunday said it would tell banks to lower mortgage rates for existing home loans by Oct. 31. It is expected to cut existing mortgage rates by about 50 basis points on average.

This follows the slew of monetary, fiscal, and liquidity support measures announced last week – China’s biggest stimulus package since the pandemic – that triggered the most explosive stock market rally in years.

Japanese markets could be in for a rocky ride on Monday, however, as investors react to the news that former defense minister Shigeru Ishiba will be the country’s new prime minister.

Ishiba has been a vocal critic of the Bank of Japan’s past aggressive monetary easing, but said on Sunday that policy must remain accommodative as a broader trend, to underpin a fragile economic recovery.

The yen surged nearly 2% on Friday, and Nikkei futures are pointing to a sharp fall at the open on Monday.

The upside for markets on Monday may also be capped by investors closing their books for the quarter, and ahead of China’s Golden Week holiday that starts on Tuesday.

Monday’s calendar is loaded with major economic indicators, chief among them being China’s official and unofficial purchasing managers index data. Also on deck are retail sales, industrial production, and housing starts figures from Japan, GDP from Taiwan, and South Korean retail sales and industrial production.

China’s markets could get a reminder of cold economic reality, with the National Bureau of Statistics PMIs expected to show that factory activity contracted for the fifth consecutive month in September.

Figures on Friday showed that industrial profits slumped 17.8% in August, the biggest decline this year. Citi’s Chinese economic surprises index is hovering around its lowest level in over a year, in contrast to the US surprises index, which is also in negative territory but still the highest in over a year.

It will take time for Beijing’s stimulus to filter through to hard activity data, so investors may have to continue putting up with some sobering numbers in the coming weeks and months.

But the wave of optimism washing over markets is undeniable. Shanghai’s blue chip equity index rose nearly 16% last week and the broader Shanghai composite jumped nearly 13%, both the biggest weekly gains since November 2008.

Hong Kong’s benchmark Hang Seng index delivered its biggest weekly rise since 1998, and the fifth largest in the last half-century. Mainland Chinese property stocks, meanwhile, leaped 16%.

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

– China official and unofficial PMIs (September)

– Taiwan GDP (Q2, final)

– Japan retail sales, industrial production (August)

(Reporting by Jamie McGeever; Editing by Lisa Shumaker)

Jobs data to test US stock market’s soft-landing hopes

Investor hopes for a soft landing for the US economy will be put to the test next week, as the government releases closely watched labor market data following a series of disappointing jobs reports.

Wall Street’s benchmark S&P 500 index is up 20% year-to-date near a record high. With the third quarter ending on Monday, the index is on track for its strongest January-September performance since 1997.

Hopes for a soft landing in which the Federal Reserve tames inflation without badly hurting growth, have helped drive those gains, along with a 50 basis point rate cut the central bank delivered at its monetary policy meeting this month.

Some worry that the rate cuts may not be enough to avert a downturn, and Wall Street views the monthly employment report as one of the more critical reads on the economy. The prior two monthly reports have shown weaker-than-expected job increases, raising the stakes for the Oct 4 data.

“Stocks are priced for a Goldilocks/soft landing-type scenario,” said Wasif Latif, president and chief investment officer at Sarmaya Partners. “The jobs report could potentially either confirm that or derail that.”

Some recent payrolls reports have roiled markets, particularly data showing an unexpected slowdown that helped spark a sharp, days-long selloff in the S&P 500 in early August. The index has since recovered those losses and gone on to make fresh highs.

For the September report due out next week, nonfarm payrolls are expected to have increased by 140,000, according to Reuters data on Friday.

The labor data could help solidify views on the Fed’s next move at its Nov 6-7 meeting. Futures tied to the fed funds rate currently show bets almost evenly split between a 25 basis point cut or another 50-basis-point reduction.

“While the totality of the data will always be important, the burden will be on incoming labor market data to provide the Fed with greater confidence that the softening trend is stabilizing,” economists at Deutsche Bank said in a recent note.

Investors will also watch an address from Fed Chairman Jerome Powell, set to speak on the economic outlook before the National Association for Business Economics on Monday.

Hefty gains in US stocks so far this year bode well for the rest of 2024, if history is any indication.

Since 1950, the S&P 500 has gained at least 15% through September in 17 instances, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. In the fourth quarter of those years, the index rose a median of 5.4% and posted a gain in all but three of them, Lerner found.

Still, the state of US growth is a focus for investors. A survey of fund managers earlier this month named a US recession as the top “tail risk” for markets, according to BofA Global Research.

Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, said the recent strength in defensive sectors such as utilities and consumer staples reflects concerns over a looming downturn.

Strong economic data, on the other hand, could provide a boost for economically sensitive groups such as industrials and financials, he said. The S&P 500 industrial sector has gained nearly 11% in the quarter, and the financial sector is up around 10%.

“There’s still probably a case to be made that we’ve priced in too much recession risk at this point,” Melson said. “There’s plenty of scope for further upside into year-end.”

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio)

China stimulus, mighty gold puts silver on a streak, but not without risk

Silver prices have bubbled up to their highest in over a decade on the back of bullion’s stellar bull run and China’s stimulus measures, although some analysts expect the rally to fade as industrial sector demand remains a concern.

Spot silver – both an investment asset due to its relationship with gold and an industrial metal – rose to USD 32.71 per ounce on Thursday, its highest since December 2012, and has gained more than 35% so far in 2024, leading the precious metals complex.

China’s central bank unveiled its biggest stimulus this week since the COVID-19 pandemic and is expected to cut its seven-day reverse repo rate. The US Federal Reserve lowered interest rates with a half-percentage-point reduction last week.

“China stimulus is giving industrial metals a boost, something silver traders had been waiting for,” Ole Hansen, head of commodity strategy at Saxo Bank, said.

“Continued gold strength combined with stable to higher industrial metal prices should see silver continue to outperform gold, with the gold/silver ratio falling back towards the 70 to 75 area, potentially driving a 10% outperformance in silver,” Hansen added.

The gold-silver ratio, denoting how many ounces of silver one ounce of gold can buy, is used by the market to gauge future trends as it indicates silver’s current performance against its historical correlation with gold.

“Interest rate cuts should provide a bullish impulse for global activity and support silver consumption. We see prices rising to USD 35 over the next 3 months and USD 38 over the next 6-12 months,” Citi analyst Max Layton said.

Macquarie, which expects that silver market deficits will persist throughout its 5-year forecast window, said investor flows are likely to remain key for near-term price action, with ETF holdings arguably offering the greatest scope for support.

However, consolidation in China’s solar industry and slower growth in the world’s second-biggest economy could pose headwinds for silver in the near-term.

“China’s newest support measures on their own will probably be insufficient to drive a turnaround in growth and traders do appear to be overestimating the likelihood of another 50 bps cut by the Fed in November,” said Hamad Hussain, assistant climate & commodities economist at Capital Economics.

“Accordingly, the rally in silver prices is unlikely to be sustained over the next few months as some of the tailwinds boosting silver demand fade.”

In top consumer China, industrial output growth slowed to a five-month low in August, underlining weakening domestic demand.

“We believe that silver is primarily dependent on gold in terms of its medium to longer-term performance rather than any silver-market specifics,” said Carsten Menke, an analyst at Julius Baer.

(Reporting by Brijesh Patel in Bengaluru; Additional reporting by Akash Sriram; Editing by Veronica Brown and Alexandra Hudson)

Oil prices slide 3% on prospect of more OPEC+ oil

HOUSTON – Oil prices fell more than 3% on Thursday on a Financial Times report that Saudi Arabia, the world’s top crude exporter, will give up its USD 100 price target in preparation for raising output, along with OPEC members and allies in December.

Brent crude futures settled down USD 1.86, or 2.53%, to USD 71.60 a barrel. US West Texas Intermediate crude finished down USD 2.02, or 2.90%, at USD 67.67 per barrel.

Saudi Arabia is preparing to abandon its unofficial price target of USD 100 a barrel for crude as it gets ready to increase output, the Financial Times reported on Thursday, citing people familiar with the matter.

Meanwhile, two OPEC+ sources told Reuters on Thursday that the producer group is set to go ahead with a December oil output increase because its impact will be small should a plan for some members to make larger cuts to compensate for overproduction be delivered in September and later months.

“They are overreacting to the story from FT,” said Phil Flynn, senior analyst for Price Futures Group.

Tamas Varga, analyst at PVM, said the report is about a preplanned unwinding of production cuts that will if implemented add 180,000 barrels per day (bpd) of extra crude oil supply each month.

“No doubt, it will loosen the global oil balance but at the same time it will reduce OPEC’s spare production capacity,” Varga said. “It will most probably lead to stock builds in 2025 and keep prices under moderate pressure. What is perhaps more important is whether it is the harbinger of a supply war within and outside the organization. If the answer is yes, a painful plunge to the USD 40/bbl area cannot be ruled out.”

The Organization of the Petroleum Exporting Countries, along with the group’s allies including Russia, together known as OPEC+, have been cutting oil output to support prices.

However, prices are down nearly 6% so far this year, amid increasing supply from other producers, especially the US, as well as weak demand growth in China.

“The prospect of additional supply from Libya and Saudi Arabia has been the main driver behind the latest weakness,” said Ole Hansen, an analyst at Saxo Bank.

A United Nations statement on Wednesday said delegates from Libya’s divided east and west regions agreed on the process of appointing a central bank governor, a step which could help resolve the crisis over control of the country’s oil revenue that has disrupted exports.

Libya’s crude exports have averaged about 400,000 barrels per day (bpd) in September, down from more than 1 million bpd in August, shipping data show.

News of a new Chinese stimulus package, however, limited further losses.

Top government officials in China, the world’s largest crude oil importer, pledged on Thursday to deploy “necessary fiscal spending” to meet this year’s economic growth target of roughly 5%, acknowledging new problems and raising market expectations for fresh stimulus in addition to measures announced this week.

(Additional reporting by Ahmad Ghddar in London, Gabrielle Ng in Singapore, and Katya Golubkova in Tokyo; Editing by Christian Schmollinger, Shri Navaratnam, Emelia Sithole-Matarise, Paul Simao, and David Gregorio)

Dollar down in choppy trading after data; Swiss franc gains following rate cut

NEW YORK – The dollar was down in choppy trading on Thursday after a host of US data indicated a relatively healthy economy, while the Swiss franc rose after the country’s central bank cut interest rates by 25 basis points (bps).

The greenback began paring losses after data showed US weekly jobless claims fell by 4,000 to a four-month low of 218,000, below the 225,000 forecast by economists polled by Reuters.

In addition, other reports showed corporate profits increased at a more robust pace than initially thought in the second quarter while gross domestic product grew at an unrevised 3%.

A gauge of new orders for key US-manufactured capital goods unexpectedly rose in August, although business spending on equipment appears to have waned in the third quarter.

“Looks like pretty good news for the dollar,” said Joseph Trevisani, senior analyst at FXStreet in New York.

“Once again we have this split between the Fed cutting rates and an economy that is essentially growing at 3% or more, so the market doesn’t quite know what to make of this.”

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.33% to 100.61 after rising as high as 100.95 in the session. The euro was up 0.34% at USD 1.117.

The Federal Reserve has recently signaled a shift in focus away from inflation and towards keeping the labor market healthy, but delivered a larger-than-usual 50-bp interest rate cut last week.

The market is completely pricing in a cut of at least 25 basis points at the Fed’s Nov. 6-7 meeting, with a 52.1% chance for another outsized half-percentage-point cut, according to CME Group’s FedWatch Tool.

SWISS RATE CUT

Against the Swiss franc, the dollar weakened 0.27% to 0.848 after the Swiss National Bank reduced interest rates by 25 basis points, echoing the moves by the Fed and European Central Bank (ECB), and left the door open for more rate cuts as inflation cools sharply.

Analysts at Goldman Sachs said the SNB cut was “motivated by lower inflationary pressure, driven, among other things, by a stronger franc” and expect a further 25-bp cut at the central bank’s December meeting given its dovish guidance and new inflation projections.

A slew of US central bank officials were speaking on Thursday, although several, including Fed Chair Jerome Powell declined to comment on monetary policy.

US Treasury Secretary Janet Yellen said labor market and inflation data suggest the US economy is on a path to a “soft landing,” but the “last mile” in the effort to tame inflation revolves around bringing down housing costs.

The Japanese yen strengthened 0.01% against the greenback to 144.72 per dollar. Bank of Japan policymakers were divided on how quickly the central bank should raise interest rates further, minutes of the bank’s July meeting showed, highlighting uncertainty on the timing of the next increase in borrowing costs.

Sterling strengthened 0.5% to USD 1.3391.

(Reporting by Chuck Mikolajczak; Editing by Paul Simao)

US yields rise as jobless claims unexpectedly fall

NEW YORK – US Treasury yields rose on Thursday after strong data, including an unexpected drop in jobless claims, led traders to cut bets that the Federal Reserve will make another 50-basis-point cut at its November meeting.

Initial claims for state unemployment benefits dropped by 4,000 to a seasonally adjusted 218,000 for the week ended Sept. 21. Economists polled by Reuters had forecast 225,000 claims for the latest week.

US economic growth also accelerated in the second quarter while gross domestic income growth was revised higher and the saving rate was raised.

“This morning’s data overall was pretty strong,” said Dan Mulholland, head of rates – sales & trading at Crews & Associates in New York.

“That put some pressure on the front-end of the market,” Mulholland added, saying that some unwinding of popular curve steepener trades and Treasury supply added to the move.

Traders are now pricing in a 51% probability that the Fed will cut rates by 50 basis points at the conclusion of its Nov. 6-7 meeting, down from 63% before the data, according to the CME Group’s FedWatch Tool.

Interest rate sensitive two-year yields were last up 6.8 basis points on the day at 3.621%.

Benchmark 10-year yields rose 0.8 basis points to 3.789% and earlier reached 3.821%, the highest since Sept. 4.

The yield curve between two- and 10-year notes flattened six basis points to 16.7 basis points. It reached 23.6 basis points on Wednesday, the steepest since June 2022.

The Fed is expected to prioritize the health of the labor market in its decision-making in the coming months as inflation recedes closer to its 2% annual target. A resurgence in price pressures, however, could disrupt the US central bank’s expected path of rate reductions.

The Fed last week kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction that Fed Chair Jerome Powell said was meant to show policymakers’ commitment to sustaining a low unemployment rate now that inflation has eased.

Traders are still pricing in aggressive rate cuts going forward, with another 74 basis points of cuts expected by year-end, and 191 basis points in reductions by the end of 2025.

“The market is still, and has been, priced for more than the Fed suggests it will deliver, even in that ‘dot plot’ that was updated just a week ago,” said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte.

Fed policymakers said last week they expect another 50 basis points in cuts this year.

“When we think about the balance of risk to yields, we see them as more skewed to the upside as it seems tough for the Fed to potentially deliver as much as the market is expecting,” Griffiths said.

Yields fell on Tuesday and odds of a larger rate cut in November rose after data showed that US consumer confidence dropped by the most in three years in September amid mounting fears over the labor market.

This week’s main US economic focus will be the Personal Consumption Expenditures index for August on Friday.

Inflation expectations have risen off their recent lows on some expectations that price pressures could move higher as the Fed cuts rates.

Five-year breakeven rates, which measure expected annual inflation over that time period, were at 2.06% on Wednesday, up from 1.86% on Sept. 10, according to data from the St. Louis Fed.

The Treasury sold USD 44 billion in seven-year notes on Thursday to solid demand, the final sale of USD 183 billion in coupon-bearing supply this week.

The notes sold at a high yield of 3.668%, around a basis point below where they had traded before the auction. Demand was above average at 2.63 times the amount of debt on offer.

The Treasury also saw decent interest for a USD 70 billion sale of five-year notes on Wednesday and a USD 69 billion auction of two-year notes on Tuesday.

(Reporting by Karen Brettell, Editing by Nick Zieminski and Will Dunham)

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