Asia shares see pockets of gains, China PMI tops forecasts

British Pound

Reuters: Sterling steadied on Friday but was set to end the week slightly lower after strong U.S. data underpinned the dollar. The pound was last up 0.1% at $1.3181 yet was set to finish the week down 0.22%. The euro was slightly lower against the pound at 84.05 pence. Investors on Friday were waiting for the release of the U.S. personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, at 1230 GMT (8:30 a.m. ET). Sterling has fallen after hitting a two-year high against the dollar on Tuesday, with stronger-than-expected U.S. economic data on Thursday helping boost the American currency.

The pound rallied over the previous two weeks, supported by investor expectations that the Bank of England will cut rates less sharply than the Federal Reserve in the coming months, after making its first reduction in August. The euro remains around its lowest against the pound in two years as investors expect faster rate cuts from the European Central Bank than the BoE. Euro zone inflation slowed sharply to 2.2% year-on-year in August, data showed on Friday. "A rebound in EUR/GBP now requires a meaningful rebuilding in Bank of England easing expectations," said Francesco Pesole, currency strategist at ING.

"That seems unlikely to happen until we get new tier-one data in the UK, as BoE officials have broadly reiterated a cautious stance on easing." Data on Friday did little to budge sterling ahead of the U.S. figures. British lenders approved the highest number of mortgages in July since the start of the "mini-budget" crisis in 2022 under former Prime Minister Liz Truss, according to Bank of England figures. Separate data showed British house prices unexpectedly fell in August for their first monthly drop since April, although they remained 2.4% higher than a year earlier.

US Dollar

Reuters: The dollar climbed to a two-week top against the euro on Monday as traders pared bets for aggressive policy easing by the Federal Reserve with the focus now moving to a crucial U.S. jobs report at the end of this week. The dollar advanced to its strongest since Aug. 21 on the yen, buoyed by a rise in long-term Treasury yields to the highest since mid-August after a closely watched measure of U.S. inflation held steady, reducing the imperative for the Fed to cut interest rates by a super-sized 50 basis points on Sept. 18. It rose as much as 0.27% to 146.60 yen, and was last at 146.29.

The dollar index measure against major peers edged up to 101.79 early in the Asian day, a level last seen on Aug. 20. The euro slipped slightly to $1.10430, the lowest since Aug. 19. Traders currently lay 33% odds of a 50-bp Fed rate cut this month, versus 67% probability of a quarter-point cut. A week earlier, expectations were 36% for the larger reduction. A U.S. public holiday on Monday makes for a potentially slow start to the week for the dollar, analysts said, but the rest of the days sees a steady flow of macroeconomic data that culminates with non-farm payrolls on Friday.

Economists surveyed by Reuters expect the addition of 165,000 jobs in August, rising from a 114,000 increase in the prior month, and that the unemployment rate ticked lower to 4.2%. "Should the U.S. economy add 150,000 jobs or more and the unemployment rate ease to 4.2% or below, it would increase confidence that the economy is on target for a soft landing," cementing expectations for a 25-bp rate reduction this month, said IG analyst Tony Sycamore. However, Sycamore believes recent dollar strength against the likes of the yen is unlikely to last. "The pair would need to see a sustained break above resistance at 152.00 to negate the downside risks," he said.

For the euro though, the outlook for both the Fed and European Central Bank to ease this month means it's "difficult to make a strong case in favour or against the EUR/USD," Sycamore added. Treasury bonds won't trade on Monday due to the U.S. holiday, but the 10-year yield stood at 3.9110% following a 4.4-bp rise on Friday. Sterling was flat at $1.3129, holding close to Friday's low of $1.31095, its weakest since Aug. 23.

South African Rand

Reuters: South Africa's rand was stable on Friday against a buoyant dollar, after the local unit hit a fresh 13-month high earlier in the day supported by improved investor sentiment on signs the domestic economy is starting to gain momentum. At 1512 GMT, the rand was flat at 17.7550 per dollar. It earlier hit 17.5950 against the greenback, a level not seen since late July 2023. The dollar last traded about 0.23% stronger against a basket of global currencies. The rand's earlier gains were pared as the greenback firmed after U.S. core personal consumption expenditure data, a key inflation reading, cemented expectations that the Federal Reserve will likely cut interest rates by 25 basis points in September.

Analysts have linked recent rand strength to a structural improvement on the supply side of Africa's most industrialised economy, with South Africa not witnessing rolling power cuts for over 150 days thanks to a big improvement in state power utility Eskom's performance. "There have been no power cuts in South Africa for several months," Commerzbank FX analyst Volkmar Baur said in a research note. "This has not happened in South Africa for years." Power cuts have hampered South Africa's economic growth for over a decade, with outages on a record 335 days last year.

Inflation also appears to have turned a corner. Data released on Thursday showed annual producer inflation in South Africa dropped to 4.2% in July. July consumer inflation fell to a three-year low of 4.6% falling close to the midpoint of the South African central bank's 3% to 6% target range and bolstering expectations the bank will cut its main interest rate for the first time in four years next month. Baur said lower domestic interest rates could stimulate further investment and structural improvements in the economy.

"This positive development reduces the risk premium that the foreign exchange market has placed on South Africa in recent years and strengthens the rand," he added. South Africa's central bank governor Lesetja Kganyago said on Thursday that the country was getting to grips with reforms that could lift its growth potential. On the Johannesburg Stock Exchange, the Top-40 index closed 0.64% down. South Africa's benchmark 2030 government bond was weaker, as the yield gained 6.5 basis point to 9.2%.

Global Markets

Reuters: Asian share markets got off to a quiet start on Monday as investors braced for a data-packed week culminating in a U.S. jobs report that could decide whether a rate cut expected this month will be regular or super-sized. A holiday in the United States and Canada made for thin liquidity, while wins for far-right parties in German state elections added a fresh layer of political uncertainty. The dollar was hanging on to gains made on Friday after upbeat spending figures led markets to trim the chance of a half-point easing from the Federal Reserve.

Futures are 100% priced for a cut of 25 basis points on Sept. 18, and imply a 33% probability of 50 basis points. They also have 100 basis points of cuts priced in by December, and 120 basis points for 2025. The Bank of Canada is expected to cut again on Wednesday, with markets implying a 22% chance of 50 basis points. Crucial for the Fed will be the payrolls report on Friday where analysts look for a rise of 165,000 in jobs and a dip in the unemployment rate to 4.2%.

"The risks going into this crucial release seem highly asymmetric as a solid report is very unlikely to derail the September cut," said Barclays economist Christian Keller. "In contrast, a weak report would likely validate the popular narrative that the U.S. economy and labour market are on the precipice, necessitating a fast and deep cutting cycle, leading to another sharp repricing." Fed Governor Christopher Waller and NY Fed President John Williams happen to be speaking after the job data, giving the market a near-instant reaction.

Also important this week will be the ISM surveys, JOLTS job openings and ADP employment, trade and the Fed's Beige Book. Those risks kept investors cautious with S&P 500 futures and Nasdaq futures little changed. EUROSTOXX 50 futures were flat, while FTSE futures added 0.3%. Asian markets mostly followed Friday's rally on Wall Street, with Japan's Nikkei up 0.5% and adding to last week's 8.7% bounce. MSCI's broadest index of Asia-Pacific shares outside Japan barely moved, while South Korean stocks edged up 0.1%.

Chinese blue chips dipped 0.6%, led by losses in real estate after a survey showed home prices growth had slowed. The Caixin survey of manufacturing showed a pick up to 50.4 in August, topping forecasts of 50.0. Surveys on Japan and South Korea factories both showed an improvement in activity. Cash Treasuries were untraded for the holidays, while Treasury futures were little moved. Ten-year yields stood at 3.914% after rising in the wake of Friday's inflation and spending data.

That rise underpinned the U.S. dollar at 146.20 yen, having rallied 1.2% last week and it now faces chart resistance around 148.54. The euro was stuck at $1.1054, after losing 1.3% last week, with political uncertainty in Germany not helping. The European Central Bank is considered certain to cut its rates by a quarter point next week following benign EU inflation figures. "However, the path after is less clear with financial markets currently pricing around 1-1/2 cuts over the remaining two meetings of the year," said Joseph Capurso, head of international economics at CBA. "We have one more cut in 2024 after September, but acknowledge that it will be a close call between one or two more cuts."

The firmer dollar combined with higher bond yields to pressure gold prices at $2,497 an ounce, short of its recent all-time top of $2,531.60. Oil prices lost more ground as the market pondered the prospect of increased supply from OPEC+ in October. Brent fell 42 cents to $76.51 a barrel, while U.S. crude lost 38 cents to $73.17 per barrel.

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