The Federal Reserve's go-to inflation gauge is finally cruising down the glide path toward the magic 2% target. That’s a big win for policymakers, who can shift their focus from wrestling inflation to keeping a closer eye on growth and jobs. The data suggests income growth is softening, and consumers feel the pinch as the labor market shows signs of cooling off. With these headwinds in play, the market’s pricing in continued and significant Fed policy easing will likely stick around for the foreseeable future. The Fed’s fight might have shifted, but the path forward for FX markets still requires careful footwork.

Core PCE deflator MoM%, 3M annualised, YoY%

The Federal Reserve's recent interest rate cut might offer temporary relief for borrowers. Still, it’s a double-edged sword, especially for higher-income households who may see their incomes take a hit. The real storm cloud, though, is the cooling jobs market. The latest consumer confidence report from the Conference Board paints a bleak picture, with more households growing increasingly anxious about job security. This spells trouble for consumer spending, no matter the income bracket.

With inflation finally becoming more controlled, market pressure for significant and continued Fed rate cuts will persist. If Friday’s jobs report shows the unemployment rate creeping back up to 4.3% and payrolls printing sub 100 K, the chatter for another 50-basis-point cut will likely get much louder. The Fed might be gearing up for more action, but it all hinges on how these job numbers shake out. This environment green-lights a weaker US dollar.

Risk assets and industrial metals caught fire, while the Dollar has eased as markets digested the perfect cocktail of China’s stimulus blitz and cooling U.S. inflation in very noisy markets.

First on the scene—China’s housing market got a jolt as three of its largest cities, Guangzhou, Shenzhen, and Shanghai, loosened the reins on homebuying restrictions over the weekend. This move didn’t just get local investors cheering; it sent a ripple effect through global markets, reigniting hopes that Beijing’s playbook still has a few tricks up its sleeve. Commodities soared, and risk assets followed suit as the idea of more stimulus fueled the reflation flames.

Add the currency wildcard from Japan, where Shigeru Ishiba threw a curveball by clinching the LDP election victory on Friday, causing USD/JPY to slide into the 142 range. Now, Ishiba is no stranger to stirring the pot—he’s been an outspoken critic of the Bank of Japan’s money-printing bonanza and Abenomics. So, naturally, expectations tilted towards BoJ normalization and, with it, yen strength.

We expect Ishiba to maintain the status quo by backing the Bank of Japan's path towards normalization, which should provide a tailwind for the Yen. Ishiba has been a strong critic of the BOJ's aggressive monetary easing policies and Abenomics in general. Given his track record, we anticipate that his leadership will lean toward a more restrained approach, potentially shifting the narrative on monetary policy in Japan.

It's the final trading day of the quarter; the double dose of stimulus from both the U.S. Federal Reserve and China buoyed it. But with the start of a new month, the focus quickly shifts to something familiar: a slew of crucial U.S. macro data that will likely set the tone for the markets. And do not rule out some huge currency swings at the WMR rebalancing at 4:00 PM London, where we hope for US dollar strength so we can fade the move.

But outside of that, what is the centrepiece of this week? Payrolls, of course. Economists expect to see around 146,000 jobs added in September. If the numbers align with that forecast (assuming no significant revisions), the three-month average for non-farm payrolls would land at 126,000—well below the level required to replace jobs. However, as we know, revisions often tell a more significant story, and they could end up being more crucial than the headline number when it comes to shaping expectations around Fed policy.

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