Softer CPI and Progress on US–China Talks Push Markets Toward Fed’s Rate Cut
Friday’s softer-than-expected September CPI report, showing both headline and core inflation at 3.0%, below the anticipated 3.1%, combined with signs of progress in U.S.–China trade talks, has significantly bolstered risk appetite in global markets. This development has led to increased expectations for the Federal Reserve’s first rate cut, anticipated this Wednesday.
Additionally, news that the U.S. and China are inching closer to a trade deal has encouraged investors to take on more risk, particularly this Monday. The market reaction was broadly positive, lifting equities while pressuring Treasury yields. Investors are rotating into cyclical assets, benefiting Asian and European bourses, alongside a weaker dollar reflecting this market shift as traders prepare for a busy U.S. earnings calendar.
Inflation Target Remains Challenging for the Fed
Despite this encouraging environment, achieving the Fed’s 2% inflation target remains a challenge, as inflationary pressures extend beyond just a few categories. The implications of this CPI data are substantial, particularly regarding the Fed’s monetary policy and its impact on economic stability.
Bitcoin Surges Amid Trade Optimism
In this context, Bitcoin surged on the news of the imminent U.S.–China trade deal, climbing 3.5% to over $115,000. This optimism surrounding easing trade tensions further fuels risk-taking among investors.
Asian markets also enjoyed significant gains, finishing at all-time highs. The Nikkei in Japan rose 2.5%, while South Korea’s Kospi hit a record with a 2.6% increase. Investors reacted positively to the anticipated framework agreement discussed between U.S. and Chinese officials, expected to be finalized during an upcoming meeting between Presidents Trump and Xi.
Expectations Build for Fed Rate Cut
These developments reflect a renewed appetite for risk, bolstered by the recent CPI data, which has led to expectations for an imminent Federal Reserve rate cut.
As the Fed prepares to deliver a 25 basis point (bp) cut this Wednesday, the softness of the inflation figures has solidified expectations for this decision, with analysts suggesting a 93% chance of a third cut in December to address growing economic concerns.
On Friday, both the U.S. dollar and the 2-year Treasury yield faced downward pressure. However, this morning, they have rebounded due to an improved risk appetite stemming from optimism around U.S.–China trade negotiations. Early reports indicate that the two sides have reached an initial agreement on major issues, including export controls, shipment levies, and fentanyl.
This promising development sets a hopeful tone for Thursday’s meeting between Trump and Xi, further shifting market dynamics as traders anticipate potential changes in monetary policy and trade relations. The upcoming Fed meeting is capturing significant attention, as its outcome could have a notable impact on various asset classes, including equities and cryptocurrencies.
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