Stocks Slip Ahead of Trump-Xi

MACRO FRAME

With global monetary policy skewing toward a renewed tightening cycle, US-China talks take center stage as markets navigate elevated oil prices.

STOCK INDEX FUTURES

Equity index futures fell lower overnight, as rising crude prices offset tentative Middle East diplomacy and AI-linked shares. The immediate market focus is whether lower oil prices can be sustained, whether US-Iran negotiations produce tangible de-escalation, and whether September PMIs validate the view that activity remains strong enough to keep another Fed hike in play. Chinese President Xi Jinping is expected in Washington Wednesday ahead of a high-stakes summit Thursday. Markets will likely focus most closely on whether officials can extend or formalize the trade truce. A constructive outcome would reduce policy uncertainty for multinational manufacturers, semiconductor and technology supply chains, consumer-electronics companies, and industrial exporters. Xi is also expected to meet executives from General Motors, Meta, Apple, Amazon, and Tesla. Their shares were flat to modestly higher in premarket trading, suggesting markets have not yet priced in a significant company-specific outcome. The AI theme continues to support the broad equity market, aided by favorable investor reception for Meta’s AI assistant, Muse. AI remains an index-level tailwind, but its benefits and risks are becoming increasingly sector-specific. That raises the likelihood of dispersion within technology, financials, consumer services, and software rather than a uniform “AI trade,” though the market is not there yet.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index rose overnight gains to 100.94, a two-month high, alongside a rise in oil prices overnight and as traders increased bets of near-term interest rate hikes. Money markets are priced for 34 bps of tightening by year-end, which is about par with yesterday’s pricing. Today’s PMI data will play a sizeable role in dollar direction: if economic strength can validate the view that activity remains strong enough to keep another Fed hike in play the dollar could see itself test the 101 level. However, if the data comes in weak, the dollar is likely to fall back toward the 100 level. Now that the immediate near-term downside risk from the BOJ is gone, oil prices will play a greater role in price action as markets look to US-China talks and the U.N. Assembly.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

EURO: The euro fell 0.38% to $1.1401. French, German, and Eurozone PMI data were constructive or the euro because they combine a meaningful upside surprise in activity with renewed price pressure, both of which make it harder for the ECB to rule out another hike. Overnight, rhetoric from ECB officials was mixed, Joachim Nagel emphasized that oil prices have become more relevant to the policy outlook, cited persistent core inflation, and left open the possibility that rates may need to move further into restrictive territory. While Philip Lane said his concern is that another energy-price surge could keep inflation elevated longer than previously expected. The euro-area composite PMI rose to 53.1 from 52.0, well above the 51.7 consensus forecast. That is a substantial positive surprise, indicating that private-sector activity accelerated rather than slowed in September and expanded at its fastest pace in nearly three-and-a-half years. Both manufacturing and services contributed to the improvement. New orders and backlogs improved while input and output price pressures strengthened, reinforcing the case for the ECB to retain a hawkish bias. Money markets expect the ECB to hike marginally more than the Fed in the next 12 months, pricing in 88 bps of tightening vs. 82 bps.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling is 0.50% lower at $1.3274. September PMI data showed private-sector activity in the UK continued to expand, albeit that growth slowed and that the headline figure fell short of expectations. Firms cited subdued domestic demand and geopolitical uncertainty as headwinds while in manufacturing, AI investment and higher defense spending continued to fuel activity.  Government borrowing figures revealed the UK borrowed more than expected in August, pushing the deficit further above official forecasts ahead of Healey’s first budget next month. Focus remains on the outlook for the Bank of England following its decision to hold rates steady, while it warned that tighter policy may be necessary to curb higher oil prices. Money markets are fully priced for a hike by year-end and are pricing 86 bps of tightening by April of 2027.

JAPANESE YEN: The yen is 0.34% weaker at 157.35 yen per dollar. Japanese markets are closed through Wednesday for holiday, which could provide officials in Japan an opportunity to intervene in the market and prop up the yen with another round of intervention. The BOJ underwhelmed the investors following its divided decision to raise rates and Governor Ueda’s unconvincing press conference. Ueda said that underlying inflation is approaching 2%, and that the bank’s focus has shifted to guard against an inflation overshoot. Still, Ueda talked down back-to-back hikes or 50 bp increases, saying those moves were reserved for situations where inflation is extremely high and exceeding target. The two dissents come from the new, Taikaichi-appointed members, who were seen as being added to the board to influence policy in her favor. For the yen, the longer-term path appears biased toward gradual appreciation, though with real wages being low rather than negative, the path for policy could lag expectations.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie is 0.79% weaker at $0.7056. Reserve Bank of Australia Governor Michele Bullock on Tuesday reiterated that inflation risks may be materializing did not offer any guidance on the path for interest rates this year. The Commonwealth Bank of Australia and ANZ joined the other two Big Four Australian banks in expecting a rate hike this year. ANZ is also expecting an additional move to 4.85% in November. The RBA left its cash rate at 4.35% at its August 12 meeting, by its own account a straight hold-versus-hike debate, not a cut discussion, after June labor data showed a still-robust market (employment +76,300, unemployment 4.4%, participation up to 67.0%), consistent with a cautious, higher-for-longer stance. Q3 inflation figures will continue to serve an outsized role in determining RBA policy and given that the September policy meeting is a month before the release, policymakers could wait until that data arrives before making any decisions. Markets are fully priced for a rate hike before year-end.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields moved higher across the curve in a flattening move as oil prices fell. PMI data later this morning will be the key catalyst for yields, especially if the data can validate the view that the economy remains strong and that price pressures are robust. Elsewhere, the overnight rise in oil prices have helped drive yields higher this morning and are likely to play a dominant role heading into the Trump-Xi meeting outcome. Boston Fed President Susan Collins also said she supported last week’s rate hike amid concerns that future inflation could remain above the 2% target. Richmond Fed President Tom Barkin said on Tuesday that inflationary shocks could take time to fade and that elevated price pressures risk becoming entrenched.  Inflation risk, fiscal and corporate supply, capital competition and term premium are likely to remain the key factors in shaping long-term yield direction. Inflation expectations should remain anchored and leave further room for term-premium and corporate debt supply to determine price direction. St. Louis Fed President Musalem said that the Fed will need to raise rates further to combat inflation resulting from strong demand as well as the commodity price shock, which has moved beyond oil. Musalem is not a voting member on the FOMC and did not hint at the Fed’s possible next steps.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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