The first set of inflation data from the Eurozone countries was mixed. Later this morning, we will find out the overall Eurozone inflation number for September. With a little bit of chance, the actual data will meet the soft market expectations, and strengthen the hand of the European Central Bank (ECB) doves. Yet this month’s figures should be taken with a pinch of salt.

The EURUSD tipped a toe below the 1.05 mark than rebounded on the back of a global retreat in the US dollar rally. The dollar retreated on the back of a soft set of economic data. Except from the light jobless claims report, the data showed that corporate profits didn’t improve as much as expected, real consumer spending slowed and the US GDP was revised marginally higher from 2% to 2.1%. The soft looking data led to some profit taking in the greenback. The dollar index retreated after a four-day rally that pushed it to the highest levels since November.

The US PCE, the Federal Reserve’s (Fed) favourite gauge of inflation is due before the week ends, and the US government shuts down. Core PCE may have slowed in August but the headline figure will likely reflect the rising gasoline prices, which could push the Fed doves out of the race.
On the US political scene, there was not much progress regarding the negotiations to avoid a government shutdown. The US government will more likely be shut from next week and strikes in Detroit will extend into another week,

In Japan, inflation came in slower than expected in September. If the US dollar rally wasn’t cooling, we would’ve seen the USDJPY go straight above the 150 level.

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The selloff in bonds continues on US government drama. The sell-off in US 10-year papers accelerated yesterday and the 10-year yield spiked to 2.64%. The 2-year yield however, which captures the expectations on Federal Reserve (Fed) actions remain steady a touch above the 5% mark, on slow down worries on all the government and Detroit drama.

Volatility in US bond markets is rising, and the US dollar continues to amass major safe haven demands. Gold slipped below the $1900 per ounce.

In equities, energy and technology stocks helped the S&P500 limit losses yesterday. The energy sector was up as crude oil rallies past $95pb. AI stocks were up as US President Joe Biden said that he will sign an executive action on AI this fall, and Meta announced to introduce AI features in Instagram, Messenger, and WhatsApp.

Earlier this week, Amazon announced to buy a $4 billion stake in Anthropic, similar to Microsoft’s creator of ChatGPT. The deal is a big deal for Amazon.

Zooming out, the S&P500 remains under pressure. Despite an insatiable appetite for AI, the rising yields threaten valuations, the index approaches a critical support zone. In the short run, the risks remain tilted to the downside, as JP Morgan’s Hedged Equity Fund holds tens of thousands of protective puts that will expire on Friday!

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Investors continue to dump stocks and buy US dollars on looming uncertainty regarding whether the US government will be shut in three days. There is progress regarding a 6-week short-term funding deal, but getting an approval from the Senate will be a challenge.

The looming government shutdown talks continue feeding into a stronger US dollar. The S&P500 fell to the lowest levels since the beginning of June and the Stoxx 600 could slip below 445 due to slowing European activity, waning Chinese demand, the European Central Bank’s (ECB) pledge to keep the monetary policy tight until inflation comes down significantly. The euro’s depreciation makes inflation harder to ease along with rising energy prices.

After a few sessions of consolidation, and despite a more than 1.5-mio-barrel build in US crude inventories last week, US crude is upbeat this morning, again. The barrel of American crude is trading above the $92 level, as the European nat gas futures flirt with the 200-DMA.
The combination of higher energy and stronger dollar has well pushed inflation in Australia to 5.2% in August, up from 4.9% printed a month earlier -which was a 17-month low. We could see a similar upturn in global inflation metrics due to rising oil prices. The Eurozone data will soon be coming in.

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The US yields rose, and the dollar extended gains yesterday as the looming US government shutdown drama got the only remaining big rating agency company Moody’s to sound cautious about the US’ AAA rating. The US 10-year yield advanced past the 4.55% level, the US dollar and the S&P500 gained.

Yesterday’s renewed dollar rally pushed the EURUSD below a critical Fibonacci level yesterday, sterling, franc, and yen also extended losses against the greenback. Gold’s trend and momentum indicators turned negative, and the precious metal is about to show a death cross formation on daily chart.

In energy, the barrel of US crude stabilizes around the $90pb, the daily MACD index fell to the negative territory for the first time since the beginning of September, and the impact of US shutdown drama on growth outlook, and the deepening real estate crisis in China. Nat gas futures are under renewed buying pressure on extension of Norwegian supply outages. And the Eurozone countries will be releasing latest inflation updates, later this week, in this chaotic environment.

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The week started on a cautious note as stocks in Asia mostly sold off following a rough week in the US, where the Federal Reserve’s (Fed) hawkish pause triggered a fresh wave of worries that the rates would stay higher for longer. The yields pushed higher as the S&P500 recorded the worst performance over the week since the banking crisis in March.

The UAW strikes will broaden to all GM and Stellantis parts plants in the US, which means that 5600 more workers will join the movement (Ford will likely be spared, for now, as some good progress is made on negotiations with the UAW) and the US will shut down by the end of the week if politicians fail to pass a dozen of bills. The latest US GDP update will fall in this chaotic environment, but the expectation is a positive revision !
In the currency markets, the US dollar extends gains. The dollar index entered the bullish consolidation zone after the Fed decision, the EURUSD tested an important Fibonacci support last week, and the USJDPY pushes timidly higher, fearing a direct FX intervention to turn the market upside down.

Inflation numbers will be on the menu in many locations this week. For Europe, any softness in inflation should give further support to the euro bears, while higher than expected numbers, which I believe could be the surprise of this week could revive the European Central Bank (ECB) hawks, but will hardly prevent the euro from seeking into a deeper depression.

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