Ella 
European stocks opened lower and closed higher. German bund yields rose about 3-4 basis points, taking the 10-year yield to the highest level since the financial crisis in August. The yen has lagged other global currencies in currency markets. That’s all we have to say about yesterday’s uneventful trading day, when U.S. markets were closed. News this morning is still very limited, although we did see an article from Bloomberg. The financial news agency cited people familiar with the matter as saying that the European Central Bank’s decision to cut interest rates to above 3% would spark more controversy. The current interest rate level of 3.75% is still restrictive, and given the poor economic development momentum, there is no doubt that interest rate cuts will be carried out two to three times in the future. However, the policy committee’s view on the price outlook and the neutral rate is increasingly divided – an issue also raised by Reuters yesterday. Estimates of the neutral rate range from 2-3%, which means that for some (the hawks), a neutral rate below 3% has the potential to halt or even reverse the ongoing deflationary process. Euro zone money markets expect the European Central Bank to cut interest rates to around 2% by 2026.
U.S. Treasuries traded for the first time this week after the Labor Day weekend. In Asian trading, U.S. bonds gained about 1 basis point across the curve. Commodity currencies are on the defensive, with currencies such as the Australian dollar pressured by falling iron ore prices, which are near multi-year lows in 2024. The yen ended a four-day losing streak against the dollar and topped the list. Bank of Japan Governor Kazuo Ueda reiterated in a document submitted to a government panel that more rate hikes would be possible if the economy and inflation develop in line with the central bank’s outlook. Today’s economic calendar is an appetizer. The U.S. manufacturing ISM is expected to rebound to 47.5 from an unexpected sharp decline last month to 46.8. This would be the first improvement in four months. But we believe this is only relevant for day trading as there are some other key data due out later this week. More specifically, Friday’s payroll report will largely determine the size of the Fed’s first wage cut on Sept. 18. From a market perspective, we are particularly concerned that if today’s data and other data result in an upside surprise, yields now appear to have hit the August bottom. This would support a recovery in core/U.S. bond yields from recent lows/technical support areas. The first meaningful support (USD resistance) for EURUSD is near 1.098-1.10. The dollar is expected to trade between 102.16/102.36.
