US EARLY MORNING: US futures are lower after seeing their best two day rally since April 2020, and ahead of OPEC, Services ISM, ADP

SNAPSHOT: US equity futures are lower By 0.7-1.1%, with the Russell 2000 leading the downside; US indices giving back some of the solid gains booked over the previous two trading sessions this week (the biggest two-day rally since April 2020), where the S&P 500 price action has seen the index rally to and then subsequently become generally capped by the 3,800 level, with some desks suggesting that sellers lurk above that handle into key data releases, including today’s ADP and Services ISM, Thursday’s weekly claims data, and Friday’s official jobs data, all ahead of the CPI report due on October 13th. This week’s gains have been based on speculative hopes that the Fed could ease up on its hawkish monetary policy after a soft September Manufacturing ISM data on Monday, JOLTs data for August falling and undershooting expectations on Tuesday, all amid some nascent calls from some institutions like the IMF and the World Bank urging the Fed to be more cognizant of the impact its policy has on other nations, something that was acknowledged by the Fed’s 2024 voter Daly on Tuesday. Hopes that the Fed will relent on its hawkishness has resulted in a dovish repricing of the market’s expectations of where the peak Fed Funds Rate will be (now expects between 4.25-4.50% in Q1 2023; last week, this pricing was discounting a move to at least 4.50-4.75%, in line with the Fed’s September projections). For what it’s worth, key Fed officials have recently emphasised that tackling high inflation remains their priority, and even seem willing to push the economy into a recession to achieve its goals, though many have said they still see a path to a soft landing. Oversold technical conditions were also cited as a factor that supported equities this week. Meanwhile, US Treasury yields are climbing by 3-7bps, and breakevens are wider, as the market prepares for OPEC to announce an output cut, potentially as much as 2mln BPD – this could come from existing production rather than quotas, meaning that the upward price move in crude contracts could be sharp, the FT said. The Dollar Index is also trading with a firm tone on Wednesday, weighing on other peers; the NZD appears to be holding up a little better than other activity currencies, however, after its central bank lifted rates by 50bps overnight, in line with expectations, but showed no signs it was prepared to pare back the pace of its normalisation, which some suggest its Antipodean peer the RBA has done this week.

DAY AHEAD: OPEC’s policy meeting is in focus amid reports that OPEC and its partners will potentially cut output by as much as 2mln barrels at its meetings later today, an outcome that could trigger the US to release reserves from its SPR, analysts speculate; our updated primer can be accessed here. The US day sees the release of the ADP National Employment survey, which will help shape expectations for the official nonfarm payrolls data due Friday; that jobs data at the end of the week will in itself play a key role in building expectations for the Fed’s November policy meeting, at a time when many market participants, and money market pricing, is looking for the central bank to ease up on its hawkishness. The US day will also see the release of the key ISM services data, with particular attention to fall on the forward-looking new orders, the employment sub-component, as well as the prices measures; the manufacturing equivalent this week disappointed expectations and resulted in a dovish revision of the market’s implied view of the Fed rate hike trajectory. Full Day Ahead can be accessed here.

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05 Oct 2022 - 09:23- EquitiesData- Source: Newsquawk

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