In Europe, falling inflation figures and poor labor market sentiment have led markets to raise the probability of a rate cut to 90% this month. The Fed’s lack of haste to cut rates and the increasing likelihood of a 25 basis point rate cut, along with the strong expectation that the ECB will also cut rates, continue to put pressure on EUR/USD.
The rate cut, which ECB officials did not consider possible three weeks ago, seems almost certain for the meeting on October 17. The latest inflation data showed that there is room for easing. Annual inflation in the Eurozone was announced as 1.8% in September, falling below the ECB’s target (2%) for the first time since 2021. The slowdown in inflation is also increasing expectations for a rate cut. Economists’ expectations are also changing. While it was previously expected that the rate cut would take place in December, institutions such as Morgan Stanley and Barclays have changed their views with the reports they have published. The fact that the European economy is struggling to grow is also one of the reasons that increases the probability of a cut. SP Global’s weaker-than-expected business surveys have strengthened expectations of a rate cut.
The ECB cut its overnight deposit rate by 25 basis points in June this year, skipped August and lastly cut it from 3.75% to 3.50% in September. European Central Bank (ECB) President Christine Lagarde said the labor market remained resilient, but employment growth slowed to 0.2% in the second quarter. Lagarde said they will continue to follow a data-driven approach in this process and that policy rates will remain restrictive as long as necessary in line with the inflation target.
EUR/USD has approached a key technical support level at its 55-day moving average of $1.1028. A break below this could trigger algorithms and lead to further declines in the currency. EUR/USD fell in April as markets pushed expectations of a Fed rate cut to later maturities. When I look at the spreads in the money markets, I can clearly see that the interest rate spreads, which will currently be reduced by the FED by 180 basis points and the ECB by 170 basis points by the end of 2025, have narrowed.
The data set announced is quite good compared to our expectations. However, seasonality-related revisions in September are generally noticeable. After this data set, the base scenario for the Fed is a 25 basis point reduction in November. The median expectation in the headline figure is well above 150,000 (70k-220k range) and even above the highest estimate (220k) (254k). There is a +72k revision for the last two months. The three-month average of the headline increased to 186,000 (Last month it was 140k). The three-month average of the private sector increased to 145,000 (Last month it was 103k). There is a contribution of 32,000 from the public sector this month. The item that includes services such as hotels, food and beverages, restaurants increased by 78k. The health services and social assistance side also increased by 81k. There is a loss of employment in the manufacturing sector, transportation & warehousing side and the item that includes forex/3rd party jobs.
The unemployment rate has decreased from 4.2% to 4.1%. The participation rate is the same as last month at 62.7%. The increase in employment seen in the household survey is 430k. The broad unemployment rate has also decreased from 7.9% to 7.7%. While average hourly wages were revised upwards in both monthly and annual changes in August, they were above expectations in September. If our subject was inflation, we would have to elaborate more on this. It is not currently necessary. The average working hours have also decreased from 34.3 to 34.2. This is data that supports a soft landing. If you only look at this data and read comments like there will be no landing, the Fed will not make a discount, my advice to you is: Don't believe it.
This week, with Powell's speech, ISM services data and Nonfarm Payrolls, the Fed expectation for November is 25 basis points. If such good data continues to come, comments that it may not cut interest rates will even increase. The base case scenario for us is a 25 basis point cut. We will carefully examine the revision of this data. In the idea of good data and good pricing, US indices are positive. We think that the Nasdaq 100 index will make a good premium today after this data. Precious metals will sell. The dollar index will be stronger for a while. Yields in US 10-year indices will continue to rise "for now". US 10-year indices will create a good trading opportunity. The Bitcoin side should also be positive. The oil side continues in the geopolitical process.
Following Israel’s launch of a ground operation in southern Lebanon on Tuesday, clashes have intensified in the border regions and Israeli airstrikes on Lebanon have increased. There have been particularly violent explosions near Beirut Rafik Hariri International Airport, where Hezbollah is strong. Videos from the city clearly show the magnitude of the explosions around the airport. The Israeli army had previously warned civilians near two buildings in the southern part of the city prior to the airstrikes to evacuate the area. Israel’s target is Hashim Safiyuddin, who is seen as the successor to slain Hezbollah leader Hassan Nasrallah. According to Israeli military intelligence, Safiyuddin was trying to hold a small-scale meeting with several other senior Hezbollah commanders. It is not known whether Safiyuddin is alive at the end of the attack.
The tension between Iran and Israel has prevented us from seeing the biggest weekly increase in oil prices in the last two years. Oil prices, which fell below $70 at the beginning of the week, rose rapidly to above $77 after Iran launched a missile attack on Israel. There are reports in the Israeli and US press that Israel may target Iran’s oil infrastructure in retaliation. According to Goldman Sachs, if this happens, we could see a 1 million barrel drop in oil production and a $20 increase per barrel.
In addition, the disruption of transit in the Strait of Hormuz could threaten global oil supplies and significantly increase prices. Energy analysts emphasize that a possible conflict in this region could have a major impact on global oil markets. While increasing oil production from the US and lower demand from China have eased the pressure on oil prices to some extent, ongoing tensions in the region have the potential to push oil prices even higher. Iran exports 1.7 million barrels of oil per day, most of which are carried out from a terminal on Khark Island, about 25 km off the country’s southern coast. “The market was ignoring the geopolitical risks,” Ben Luckock, global head of oil at Singapore-based commodities company Trafigura, told the Financial Times. “But where prices go from here will depend on what Israel targets in Iran. We are all watching and waiting.” There are concerns that Israel could target Khark Island and that Iran and its proxies could respond by targeting energy operations in the region.
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