Don't Stop Believin' (in More Stimulus from China)

• Anticipation of greater Chinese stimulus measures triggers a modest rally in risk assets.

• The PBOC cut the 14-day reverse repurchase rate 10 bp to 1.85% and plans to give a briefing tomorrow on financial support for the economy.

• The spotlight today is on relative growth momentum with the release of the September PMI readings for the EU, UK, and US.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

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USD is mixed near recent lows with growth-sensitive currencies outperforming the safe havens. Asian stock markets are higher while US and European equity futures are up. Expectation of greater stimulus measures out of China and market pricing an aggressive Fed easing cycle are underpinning risk assets. Fed funds futures imply another 75 bp of rate cuts by year-end.

We continue to believe the market is overestimating the Fed’s capacity to ease. However, it will likely take strong US jobs data to trigger a material upward reassessment in Fed funds rate expectations. The next non-farm payrolls report is due October 4. Until then, a more dovish Fed and a strong US economy offer financial market risk sentiment support and can further undermine USD mostly against growth-sensitive currencies.

The US September preliminary PMIs are forecast to remain indicative of an encouraging growth outlook (2:45pm London). Manufacturing is expected to rise 0.7pts to 48.6, services is projected to drop 0.5pts to 55.2, and the composite index is forecast to dip 0.3pts to 54.3.

Fed Governor Christopher Waller explained Friday why he thought a 50 bp rate cut was the “right thing to do”. Waller noted that the August CPI and PPI reports showed him that “inflation is softening much faster than I thought it was going to”, adding the 50 bp cut was not done out of a concern that the Fed was “falling behind the curve.”

Fed Governor Michelle Bowman issued a statement Friday to justify why she dissented from the FOMC decision to slash rates by 50 bp and voted in favor of a 25 bp rate reduction. Bowman pointed out the US economy remains strong, inflation remains a concern, and cutting rates at a measured pace “would also avoid unnecessarily stoking demand.” We agree with Bowman.

Today, Atlanta Fed President Raphael Bostic (FOMC voter and a leading hawk) speaks about the economic outlook (1:00pm London); Chicago Fed President Austan Goolsbee (2025 FOMC voter and staunch dove) speaks on monetary policy and the economy (3:15pm London); Minneapolis Fed President Neel Kashkari (non-voter) talks about the economic impact of early childhood education (6:00pm London).

EUR/USD is trading in a tight range around 1.1160. The Eurozone September preliminary PMIs are forecast to remain consistent with soggy economic activity (9:00am London). Manufacturing is expected to dip 0.1pts to 45.7, services is projected to drop 0.6pts to 52.3, and the composite index is forecast to fall 0.5pts to 50.5. France and Germany’s PMIs are released earlier (8:15am and 8:30am London, respectively).

GBP/USD is holding near recent highs above 1.3300. The UK September preliminary PMIs should reinforce the case for a cautious Bank of England easing cycle (9:30am London). Manufacturing is expected to dip 0.3pts to 52.2, services is projected to drop 0.2pts to 53.5, and the composite index is forecast to fall 0.3pts to 53.5.

Stocks in Asia rallied on hopes Chinese policymakers boost stimulus measures. The People’s Bank of China (PBOC) cut the 14-day reverse repurchase rate 10 bp to 1.85% raising expectations of additional cuts to the policy-relevant 7-day reverse repurchase rate and 1-year medium-term lending facility Wednesday. Moreover, the PBOC and China’s National Financial Regulatory Administration and Securities Regulatory Commission are scheduled to hold a press conference tomorrow (2:00am London). Nonetheless, China’s huge debt overhang (around 300% of GDP) will blunt the effectiveness of monetary policy in boosting growth. In fact, China reported soft August money and new loan data despite the PBOC slashing key policy rates in July.

AUD is outperforming on expectations of greater stimulus measures out of China. In Australia, the flash September PMIs point to a downturn in economic activity. The composite PMI dropped to an 8-month low at 49.8 vs. 51.7 in August as services sector activity expanded at the slowest pace in two months while the contraction in the manufacturing sector deepened to a 52-month low.

Tomorrow’s RBA rate decision is the domestic highlight (5:30am London). The RBA is expected to keep the cash rate target unchanged at 4.35% and stick to its neutral guidance that “the Board is not ruling anything in or out”. We also anticipate the RBA to caution again “that it will be some time yet before inflation is sustainably in the target range” and “the need to remain vigilant to upside risks to inflation.”

Earlier this month, RBA Governor Michele Bullock warned of the cost of high inflation and emphasised that “if the economy evolves broadly as anticipated, the Board does not expect that it will be in a position to cut rates in the near term.” While a rate cut is not on the agenda tomorrow, attention will be on Bullock’s post-meeting press conference to see whether the Board considered a rate rise. We struggle to see how the RBA Board can still debate the case for a rate rise when Australia underlying economic activity is weak and points to lower inflation pressures.