Stocks rally and yields plunge on softening inflation hopes, ISM shows weakness, crypto range-bound

US stocks are surging to kick off October, helped by tumbling Treasury yields after a key manufacturing report showed noticeable signs of downward pressure on inflation. ​ It is premature to say that the Fed is almost done with tightening, but it seems Wall Street is growing confident that they could be done in December. Investors are starting to doubt central banks globally will remain aggressive with fighting inflation as financial stability risks are growing; first we almost had a gilt market crash and now Credit Suisse is struggling with capital concerns. It is too early to call for a Fed pivot, but it seems the action in Treasury markets suggests traders are growing confident that the global growth slowdown is starting to drag down pricing pressures. ​ ​

ISM falls

The ISM manufacturing report clearly shows factory activity is slowing down. ​ The headline manufacturing gauge fell to 50.9, the lowest levels since the early days of the pandemic and a sharper decline than the consensus estimate of 52.0. ​ The components showed both new orders and employment fell into contraction territory. ​ The employment index fell from 54.2 to 48.7, which might lead to some softer expectations for manufacturing jobs in Friday’s NFP report.

Fed tightening is working and starting to impact more parts of the economy. The Fed, however, needs to keep going as inflation still remains elevated and that argument was supported by the ISM prices paid component which is still declining, albeit at a slower pace.

Crypto

Bitcoin is slightly higher as risky assets rally following a global collection of weakening manufacturing data that support the idea central banks won’t have to remain as aggressive with the tightening of monetary policy. ​ The September Swoon for stocks is over and the first move for many traders is to go back into stocks first and crypto last. ​ Bitcoin has outperformed equities over the past couple of weeks, so today’s strong stock market moves should not come as a surprise.

Despite some signs of downward pressure on inflation, bitcoin is still poised to remain stuck in a consolidation pattern. ​ Calls for a Fed pivot are premature and that should put a cap on how high risky assets rebound here. ​

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