Stocks upbeat as Fed rate hike bets recede

Stocks were off to a strong start on Monday while bonds steadied, as investors trimmed bets on an aggressive policy tightening cycle by the Federal Reserve following cooler-than-expected US jobs data.

Trading was thin in Asia with holidays in China, South Korea and Australia’s New South Wales, leaving markets to take their cue from Wall Street’s moves on Friday.

Data last week showed US job growth slowed more than expected in September and the nonfarm payrolls count for the prior two months was revised sharply lower, almost taking another rate hike from the Fed this month off the table.

“Labour conditions are stable overall, but Friday’s downward revisions signal that the US economy has lost jobs in two out of the nine months year to date, and the risk of further employment losses means that the Fed can’t hike another 100 basis points from here, which is what the curve is pricing in,” said Jose Torres, senior economist at Interactive Brokers.

Investors are now pricing in just a 22% chance that the Fed could raise rates this month, as compared to a 64% chance a week ago, according to the CME FedWatch tool.

The growing prospect of a Fed pause this month helped Japan’s Nikkei rise 2% early in the session, while Australian stocks added 0.5% and MSCI’s broadest index of Asia-Pacific shares outside Japan ticked 0.15% higher.

Nasdaq futures and S&P 500 futures advanced 0.3% and 0.1%, respectively, while EUROSTOXX 50 futures gained 0.3% and FTSE futures tacked on 0.4%.

In Brazil, markets there are expected to jump later in the day after it became clear that Brazilian Senator Flavio Bolsonaro will face President Luiz Inacio Lula da Silva in the runoff of a presidential election, doing better than expected in the first round of voting.

Bonds in focus

A recent selloff in global bonds hit pause on Monday, with benchmark 10-year US Treasury yields retreating slightly to 5.2643% while two-year yields stood at 4.8143%.

While yields fell slightly in the wake of the US jobs data, they closed higher on Friday as the report did not rule out further Fed rate hikes in the coming months.

Still, yields across major economies remain near multi-year highs, as bond prices come under pressure from deteriorating government finances, a glut of issuance and elevated energy costs.

Cedric Lam, senior investment strategist at Standard Chartered, said that while recent US data has started to show softer-than-expected inflation, “market technicals” are likely temporarily delaying a move lower in bond yields, due to forced selling among hedge funds and real estate investment trusts.

“Nevertheless, we do not expect this to be an extended selloff. We have initiated an opportunistic bullish idea on US 10-year government bonds,” he added.

In commodities, oil prices stayed elevated after Yemen’s Iran-backed Houthis said they launched ballistic missiles and drones at Saudi Aramco sites in Riyadh and the Khurais area.

Brent crude futures were little changed at US$102.20 per barrel while US crude last stood at US$90.75 a barrel.

Spot gold rose 0.3% to US$4,154.32 an ounce.

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