Monthly Market Outlook

The Federal Reserve has kicked off the next cycle with a jumbo rate cut, while other central banks continue to adopt a more dovish tone in their speeches. The global economy has officially entered a rate-cutting phase. Although central banks were in the spotlight in September, the situation in the Middle East escalated further. However, if tensions do not spiral out of control, traders’ attention may shift toward the upcoming US election, with just under a month until Election Day. 

Macro View 

The Federal Reserve began its rate-cutting cycle with a bang! Market expectations were mixed ahead of the FOMC meeting, with uncertainty over whether the Fed would cut by 25 or 50 basis points. Ultimately, the Fed opted for the more aggressive move, cutting 50 basis points at the key meeting. Additionally, policymakers signaled two more rate cuts for the remainder of 2024. The combination of an upward revision to unemployment projections and a downward revision to inflation forecasts justified the accelerated pace of cuts. The main focus of the rate debate now centers on the rising unemployment rate. 

Unemployment has risen quickly in recent months, with payroll data seeing significant downward revisions. The rapid slowdown in the job market is raising concerns about a potential hard landing, similar to the previous two rate-hiking cycles. The infamous Sahm rule has also been triggered. However, last week’s jobs report told a different story. Nonfarm payrolls increased by a whopping 254k, well above the expected 150k, and unemployment dropped to 4.1% from 4.2%—marking the second consecutive 0.1% decline. In addition to the drop in unemployment, hourly earnings rose more than expected and outpaced inflation. This near-perfect jobs report has reignited hopes for a soft landing. But the question remains—will it last? 

Following the strong jobs report, markets no longer expect a 50 basis point rate cut in November. Current pricing reflects expectations of two 25 basis point cuts for the remainder of the year, aligning with the FOMC’s projections. We believe the two small cuts are the most likely scenario for now, as inflation continues to decline slowly, and despite the recent report, the job market is sending numerous signals that it is cooling. 

Global PMI data remains strong, but momentum appears to be shifting slightly downward. However, the gap between manufacturing and services remains wide, creating asymmetrical growth across economies. Services sectors continue to perform well, despite inflation and wage increases. The latest ISM services data showed a significant rise in new orders, possibly an early reaction to rate cuts. On the other hand, the slump in manufacturing is affecting industry-heavy economies like Germany and China more severely. 

Recent policy moves from China have sparked some hope for recovery, but significant headwinds persist. In the Eurozone, the composite PMI fell below the 50 mark, showing negative divergence once again. The introduction of temporary taxes on companies will likely exacerbate the situation. In the UK, economic activity has been steady, especially after the political turmoil subsided. Bank of England Governor Bailey’s signal for rate cuts could boost economic confidence as well. Japan’s new prime minister delivered a surprise speech last week, stating that it is not the right time to raise rates further. 

Looking ahead to October, two major topics will take center stage. First is the US election, where the race is extremely close, according to the latest polls. The uncertainty could create anxiety in the markets as the election date approaches. A tight election could also increase political and social risks in the US. As for the candidates, neither of their policy proposals seem likely to curb the rising national debt in the coming years, suggesting that pressure on the bond market is likely to persist even with rate cuts from the Fed. 

The second topic is geopolitical risks. The turmoil from the Russia-Ukraine war shows no signs of abating, and tensions in the Middle East have escalated, with Israel initiating active operations in Lebanon and Iran-Israel conflict risks risen. The outcome of these geopolitical risks could also depend on the US election. 

Central Bank Meeting Calendar 

Technical View 

The U.S. 10-year government bond yield broke its uptrend over the summer, and a newly formed downtrend channel is now in effect. Although expectations of rate cuts are keeping downward momentum strong, recent robust U.S. economic data has sparked a reaction from the lower boundary of the channel. Currently, 4% is acting as resistance, but if strong data continues, a move toward 4.50% could begin, offering bond bulls good buying opportunities if that happens. 

Brent crude oil nearly broke the critical $70-72 support zone. Weak global economic data, especially from China, OPEC’s reluctance to hold production quotas, demand concerns, and fears of a hard landing have all contributed to downward pressure. However, recent developments in the Middle East have caused a spike in oil prices. Israel’s operations in Lebanon, Iran’s missile attacks, and the potential for Israel to target Iranian oil fields and further escalate the situation have instilled fear in the oil market. Geopolitical risks are keeping oil prices above $70, but medium-term downward pressure is building. Traders will closely monitor whether rate cuts and Chinese economic measures can jumpstart global economies while keeping an eye on geopolitical risks. 

Precious metals surged after the Federal Reserve initiated its rate-cutting cycle with a jumbo move. Silver remained relatively low in August but caught up with gold in September, surging more than 9%. Gold continued its steady advance. Platinum and palladium also rose, buoyed by hopes of recovery in the auto sector due to falling rates. 

Gold jumped again after breaking through the $2,525 resistance, with the rally pushing prices close to $2,700. Some overbought signals have emerged, but further escalation in the Middle East has prevented any corrective moves from taking hold. According to the COT report, managed money positions continue to increase, and ETFs have seen inflows. The $2,680-2,700 zone is the key resistance level at present. If this holds, gold may pull back in the coming weeks, with a potential correction first to $2,600, and possibly to $2,525. However, bullish sentiment and risks remain, and with central banks in a rate-cutting cycle, sharp downward moves seem unlikely for now. 

Silver closed the gap with gold in September, making a significant run up to the $32.50 top. The $32.50 level is strong resistance and has been tested for 10 days but has not been decisively broken, except for brief spikes. Silver may be forming a double top here, depending on upcoming news and data. On the other hand, a breakout could signal a move toward $34.50 or even $37 in the coming weeks. 

The dollar index has rebounded after falling hard to 100 following the Fed’s jumbo rate cut. The 99.50-101 zone has served as major support over the last three years, and it held this time as well. Strong U.S. growth, positive ISM new orders data, a surprisingly strong jobs report, and dovish signals from Japan, the ECB, and the BOE have contributed to the dollar’s strong rebound. Now that the dollar index has caught up with its moving averages, the next key level is approaching. The 103-104 zone will be critical resistance before determining the dollar’s medium-term direction. 

Stock markets benefited from a double dose of good news in September. First, the Fed delivered a large rate cut, followed by data that eased fears of a hard landing in the U.S. Many global indices followed the positive trend, but the MSCI World Index’s return was almost half of the Nasdaq-S&P 500 average. While the DAX rose 2%, the Eurozone’s political and economic situation is not faring as well compared to the U.S., even with the U.S. election approaching. 

Despite U.S. markets nearing record highs, the VIX index is flashing caution signals. From the start of the year to August, the average VIX level was 13.94. After the large spike in early August, the average has shifted. From mid-August (excluding the massive spike), the average VIX has risen to 17.25, a 24% increase. This may be an early sign of choppier market conditions ahead, but it could still be too early to draw firm conclusions. 

The S&P 500 has passed the 5,725 resistance level and is now using it as support, attempting to break out of the horizontal consolidation that has persisted since the second quarter and start a new trend. Potential targets in the event of another move are 5,877 and 6,055. However, the likelihood of a trend similar to those seen from November to March or April to June is not very high at the moment. A choppy move following a potential surge seems more likely. 

In September, the dollar index’s surge caused fluctuations across the FX market. EURUSD fell more than 1.6%, as even hawkish ECB members, such as Schnabel, leaned toward further cuts. GBP remained relatively strong until Bailey hinted at “aggressive rate cuts,” but it still held firm against the euro. However, this could change in October, with the divergence between the two currencies potentially narrowing. JPY was volatile, but after comments from the new prime minister, it lost value rapidly as October began. 

EURUSD is approaching a critical point for its long-term direction. The current downtrend channel has been in effect since 2008, pushing the pair lower. Although recent lows have not reached the bottom of the channel and have started forming a wedge, the pressure from this 16-year-long trend remains significant. Unless the pair breaks through with multiple monthly closes, EURUSD may be forming a multi-year top. The key level to watch for now is 1.1250. 

USDJPY fell sharply from 162 to 140 between July and September. The uptrend channel was broken, as the Fed and BOJ moved in opposite directions, with the BOJ starting to hike rates and the Fed beginning to cut. The heavily used carry trade began to normalize. However, the downward move was strong, and a correction was necessary, which was triggered by comments from the new prime minister. After Ishiba remarked that the environment was not ready for an additional rate hike, USDJPY began its correction. Now, USDJPY is approaching a key junction. The 150-152 zone, which was massive resistance before being broken, is likely to become resistance again, supported by the 200-day moving average. This zone may determine USDJPY’s direction in October.