Global Mood: Cautiously risk-on
Drivers: US responds to Iran proposal, US inflation eases, Fed hike bets fall

Asian markets traded mixed on Thursday as investors balanced softer inflation against elevated Treasury yields and uncertainty over the Federal Reserve’s rate path. Japan’s Nikkei rose 0.86%, while the Topix fell 0.44% and South Korea’s Kospi declined 0.8%. The SGX Nifty was at 22,626.5, down 33 points, pointing to a mildly negative opening for Indian equities.

Risk appetite remained constrained by high bond yields ahead of the Fed’s October meeting, while investors awaited corporate earnings for signals on profits and valuations. Softer PCE inflation reduced expectations of an October rate hike, with market pricing falling to around 37% from 70% earlier in the week. However, strong consumer spending and 2.2% annualised Q2 GDP growth kept the possibility of another hike later this year alive.

Geopolitical risks remained another drag. Iran received Washington’s response to its latest ceasefire proposal, while Qatar continued mediation. Hormuz shipping has improved, but crude, refined product and LNG flows remain disrupted, with two vessels hit on Tuesday.

THE BIG STORY
Iran said it received Washington’s response to its latest proposal to revive the collapsed ceasefire.  Qatar continues to mediate, with the main disagreement reportedly over the sequence of steps needed to end hostilities and reopen the Strait of Hormuz. Shipping through the Strait has improved in recent weeks, but crude, refined product and LNG flows remain significantly disrupted.  Two vessels were hit by projectiles on Tuesday, according to shipping reports, keeping supply and shipping risks elevated.

The US completed its withdrawal of the last troops from Iraq, ending a 23-year military presence. Iran and its allies have described the move as a victory, while Iraqi analysts warn that Iran-backed militias could gain greater influence.

PCE inflation rose 0.3% in August, below expectations, while annual inflation eased to 3.4%. Core PCE remained at 3.0%, giving the Fed some room to delay another hike. Markets reduced expectations for an October rate hike to around 41.5% from 70% earlier in the week. However, strong consumer spending and resilient economic growth keep another hike later this year on the table. Consumer spending surged 0.9% in August, while real spending rose 0.6%. The resilience, alongside a 2.2% annualised Q2 GDP growth rate, suggests the US economy remains relatively firm despite higher energy costs.

Data Spotlight
US April-June GDP growth was revised sharply higher to 2.2% annualised from 1.5%, following 2.5% growth in January-March. The revision reflected stronger private investment, consumer spending and government expenditure.

Non-residential structures, particularly commercial and healthcare construction linked to data centres, made the largest contribution to investment growth. Private services-producing industries grew 2.5%, while goods-producing industries expanded 2.3%.

US private payrolls increased 90,000 in September, above expectations of 70,000 and up from a revised 36,000 in August. Hiring was led by education and healthcare (+55,000) and leisure and hospitality (+22,000), while financial and professional services shed jobs.

US headline PCE inflation rose 0.3% m-o-m in August, below the 0.4% forecast, while core PCE increased 0.2%. Annual headline PCE inflation held at 3.4%, while core inflation remained at 3.0%, both above the Fed’s 2% target. Energy prices were a key driver, with gasoline and other energy goods prices rising 4.4% in August.

Germany’s inflation accelerated to 3.3% y-o-y in September, the highest since December 2023 and above the 3.2% forecast. German energy inflation surged to 14.9%, while services inflation eased to 2.7% and core inflation held at 2.4%. The euro-area harmonised inflation rate also rose to 3.3%, well above the ECB’s 2% target.

Takeaway: The data point to a resilient US economy with persistent inflation pressures, as stronger GDP growth and a rebound in private hiring suggest demand remains firm even as monthly PCE inflation came in below expectations. However, headline and core PCE remain well above the Fed’s 2% target, with energy prices adding to price pressures. In Europe, the rise in German energy inflation highlights renewed price pressures from higher crude prices and West Asia supply disruptions.

WHAT HAPPENED OVERNIGHT

US stocks mixed as softer PCE slashes October hike odds; S&P and Nasdaq notch second straight quarterly gains

• The Nasdaq rose 0.24% while the S&P 500 lost 0.25% and the Dow fell 0.86%, as gains faded into the close after 2-year yields turned higher despite the soft PCE print.
• August PCE rose 3.4% annually, below the 3.7% estimate, slashing October Fed hike odds to 37% from 51% the prior session and 71% a week ago.
• For the quarter, both the S&P 500 and Nasdaq recorded second straight quarterly gains; the Dow saw its second quarterly decline in three and snapped a five-month winning streak.
• ADP showed private payrolls rose 90,000 in September after a downwardly revised 36,000 in August, ahead of Friday's government payrolls report.
• Fed Governor Cook reaffirmed commitment to bringing inflation down without harming the labour market, without directly addressing the softer PCE data.
• Tech led with Microsoft, Apple, and Nvidia each rising, lifting the S&P 500 tech sector 0.6%.

US 10-year Treasury yield rises to 5.3% despite softer inflation

• The 10-year US Treasury yield rose to 5.3%, near its highest level since 2002, as resilient growth and persistent energy-driven inflation kept yields elevated.
• August PCE inflation rose 0.3% month-on-month, below the 0.4% forecast, while core PCE increased 0.2%, also missing expectations.
• Final Q2 GDP growth was revised sharply higher to an annualised 2.2% from 1.5%, while September private-sector hiring also exceeded expectations, reinforcing the picture of a resilient US economy.
• The softer inflation data reduced expectations for an immediate rate hike, but markets continued to price another increase in December as growth and energy-price pressures remain concerns.

US Dollar slips as softer PCE inflation eases near-term Fed hike expectations

• The dollar index slipped to 101.1 as softer-than-expected August PCE inflation reinforced expectations that the Fed could leave rates unchanged at its October meeting.
• Headline PCE rose 0.3% month-on-month, while core PCE increased 0.2%, both below forecasts, while resilient consumer spending pointed to continued underlying demand.
• Revised data showed Q2 GDP growth at 2.2%, up from 1.5%, while stronger September private-sector hiring also indicated firm economic activity.
• Markets now await Friday’s US payrolls report, with economists expecting a 90,000 increase, as a key input for the Fed’s October 28 policy decision.
• Despite Wednesday’s decline, the dollar remained up more than 1.5% in September and was broadly unchanged over the third quarter.

Oil rises as US-Iran talks stall and fuel inventories tighten

• Brent November futures rose 0.9% to $103.50/bbl, while the more active December contract gained 1.9% to $98.03; WTI rose 1.2% to $90.42.
• Brent gained about 14% in September, its biggest monthly rise since July, while WTI rose around 5%, as stalled US-Iran talks kept supply risks elevated.
• Goldman Sachs estimates Gulf oil exports recovered to 23.3 million bpd last week, in line with the 2025 average, while JPMorgan put the 10-day average at 20.5 million bpd, or 89% of 2025 levels.
• Saudi Arabia resumed tanker loadings at Yanbu after restarting its East-West pipeline, while OPEC+ is expected to keep November production targets unchanged.
• US gasoline inventories fell 1.7 million barrels and distillates declined 2.3 million barrels last week, offsetting a 922,000-barrel rise in crude stocks and highlighting tight global fuel markets.
• The White House urged the EU to draw down emergency diesel inventories, while a potential US diesel export restriction continued to widen the Brent-WTI spread and weigh on US refining demand.

Day’s Ledger*
Economic Data

• India September S&P Global Manufacturing PMI
• September Eurozone HCOB Manufacturing PMI
• US Initial Jobless Claims
• US September S&P Global Manufacturing PMI
  
  

Corporate Actions

• Bajaj Finance to consider fund raising

Policy

• BoE Gov Bailey Speaks
• BoE MPC Member Mann
• BoE MPC Member Pill Speaks
• German Buba President Nagel Speaks
• ECB President Lagarde Speaks
• ECB's Schnabel Speaks
• US FOMC Member Barkin Speaks
• US Fed Collins Speaks
• US Fed Schmid Speaks
• US Fed Waller Speaks
• US Fed Governor Jefferson Speaks

Tickers to Watch

• Indian Railway Finance Corporation said Bihar tax authorities have issued a show-cause notice to the company over goods and services tax matters for the year ended March 2023, seeking about 3.97 billion rupees.
• Infosys and Dutch lender ABN AMRO have extended their strategic partnership to broaden the bank's use of artificial intelligence across its operations.
• TECH MAHINDRA board to meet on Oct 15 to consider an interim dividend for FY27, bonus share issue and audited financial results for the July-September quarter and first half of FY27.
• BATA INDIA appoints Sanjay Rao as managing director and CEO, succeeding Gunjan Shah, who will step down after completing his five-year tenure.

Must Read

• Bond Markets Enter the MPC With More Than the Next Rate Hike at Stake
• Audit the FTAs
• Stocks Slide, but the Government’s Tax Take Keeps Rising
• India Inc’s Next Red Flag May Not Be Debt, It May Be Unpaid Invoices
• India’s Credit Boom Needs a Stronger Link to Investment and Employment

(*Compiled from various media sources)

See you tomorrow with another edition of The Morning Edge.

Have a great trading day