Caution from Powell

Federal Reserve (Fed) doves and risk-taking investors didn’t necessarily welcome Jerome Powell’s cautious tone in his speech yesterday, as the Fed Chair avoided committing to a rate cut at next month’s meeting. He repeated that the risks to the labour market are tilted to the downside, while inflation risks remain to the upside – a mixed picture that requires careful policy adjustment.

Even so, the US 2-year yield fell yesterday and is lower again this morning in Asia. Market pricing now puts the probability of an October cut at 94%. In that sense, the Fed could hardly be sweeter for doves – considering that US growth is still resilient, corporate earnings strong and inflation sticking around 3%. In other words, the Fed has no pressing reason to rush cuts beyond supporting the labour market. Powell’s remarks were arguably more reassuring than discouraging.

Other Fed officials are also speaking this week: some highlight the weakening jobs market, while others emphasise tariff-related inflation risks.

On the data front, the latest PMIs showed US business activity slowing to a three-month low in September, while prices paid for materials jumped to a four-month high. The good news: soft data supports the case for further cuts. The bad news: if inflation re-accelerates, the Fed won’t be able to move as quickly as markets might hope. For now, nothing alarming. The S&P 500 and Nasdaq retreated from all-time highs as Big Tech led a correction, but the broader narrative hasn’t changed. The Fed is easing into a resilient economy with inflation still above target, and two more cuts are expected this year. That’s fundamentally supportive for equity valuations: growth stocks benefit most from lower discount rates. Yesterday’s pullback looked more like a technical correction in a quiet session than a shift in sentiment. Interestingly, CFTC data still shows heavy net shorts in the S&P 500. Fed easing could help trigger position unwinds, adding fuel to the rally.

In Europe, PMI data was mixed but overall pointed to the euro area’s fastest private-sector expansion in 16 months. German services stood out, while French readings were softer amid political uncertainty. The stronger-than-expected outcome supports the view that the European Central Bank (ECB) won’t need to deliver another rate cut this year. The EURUSD tested resistance but failed to break higher. European equities were modestly higher, with ASML extending gains on global AI optimism.

Across the Channel, UK PMI figures came in weaker, with manufacturing contracting at a faster pace. Sterling faced selling pressure above 1.35, while the  EURGBP held firm as eurozone growth prospects look relatively stronger. The FTSE 100 remains attractive to investors seeking commodity and energy exposure, with a weaker pound adding to the appeal of its energy majors – though currency risk hedging remains prudent.

Globally, the OECD revised growth forecasts higher for many major economies this year – except Germany – but warned that Trump’s trade war still poses a significant global risk. Growth forecasts for 2026 were revised lower, particularly for the euro area and India. Elsewhere, Japanese manufacturing shrank at the fastest pace in six months, while Australian inflation hit a 13-month high – both reflecting the impact of global trade frictions. The USDJPY is hovering near its 50-day moving average, while the AUDUSD benefits from dollar softness, stronger iron ore prices, and sticky domestic inflation that tempers dovish Reserve Bank of Australia (RBA) expectations.

In China, Alibaba jumped more than 6% after announcing new AI investments, reinforcing optimism around China’s tech sector. Reports that Cathie Wood is revisiting Alibaba after a four-year absence added to momentum. Even after a 120% rally this year, shares remain about 40% below their 2020 peak.

In commodities, gold extended gains to fresh record highs, with $3,800 per ounce now the next psychological target. Geopolitical tensions, a softer dollar and strong momentum continue to support demand despite overbought conditions. Meanwhile, US crude rebounded on heightened geopolitical risks and another draw in US weekly crude inventories. Still, solid resistance is seen near the $65pb level and the short-term outlook remains rangebound within the $62/65pb range.