Earnings Season Kicks Off on Tuesday

MACRO FRAME

US activity remains resilient enough to prevent a disinflationary narrative, while fiscal stress has become increasingly evident in euro-area dynamics.

STOCK INDEX FUTURES

Equity index futures are mixed as investors weigh earnings optimism against renewed energy-market risks ahead of this week’s inflation data. Oil remains an important restraint on sentiment. Brent briefly rose above $106 following deadly strikes on Riyadh’s international airport, although gains were tempered by President Trump’s announcement of a Russia–Ukraine agreement to halt attacks on energy infrastructure. Details remain uncertain, and renewed Houthi attacks have limited confidence that the arrangement will deliver lasting energy-price relief.

Third-quarter earnings season begins Tuesday with JPMorgan, Wells Fargo, Citigroup and Goldman Sachs. LSEG IBES estimates cited by Reuters put S&P 500 earnings growth at 30.6%, providing a substantial fundamental underpinning for the market. Bank results will offer an early read on trading activity, credit quality and the impact of higher rates, while ASML and TSMC later in the week will help assess the strength of the AI investment cycle. AI-linked megacaps continue to account for an outsized share of market performance, making their earnings and spending outlooks particularly consequential. Strong profits have helped equities absorb the recent rise in yields, but Wednesday’s CPI report could challenge that balance if it revives expectations of more aggressive Fed tightening.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index rose 0.22% to 102.43. The dollar remains near an 18-month high as geopolitical uncertainty supports demand despite reduced expectations of an October Fed hike. Dollar strength increasingly reflects vulnerabilities elsewhere rather than a straightforward increase in US rate expectations. Positioning has become more bullish. CFTC data showed net long dollar positions rose to approximately $36 billion in the week to October 7, from $8.4 billion three weeks earlier, largely at the euro’s expense. That buildup underscores the strength of the recent trend but also leaves the dollar more exposed to a reversal if U.S. inflation or Fed guidance disappoints bullish expectations.

Watch point: While current fiscal, macro, and geopolitical factors favor the dollar, it is beginning to enter overbought territory and could be susceptible to a modest correction.

EURO: The euro fell 0.21% to $1.1178. French fiscal concerns remain a central headwind. France’s 10-year yield spread over Germany is around 140 basis points, narrower than last week’s near-160-basis-point peak but still elevated. The partial improvement in bond markets has not resolved uncertainty about the government’s ability to impose fiscal discipline. Evidence of European economic resilience, including upgraded German growth forecasts, are a potential source of support for the euro at lower levels. A Reuters poll showed that 90%  of economists surveyed expect the ECB to raise rates once more in December, after previously expecting the bank to be done with its tightening cycle.

Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.

BRITISH POUND: Sterling is little changed near $1.3228. EUR/GBP touched 0.8449, matching last week’s 16-month low, as French concerns weighed more heavily on the single currency. Bank of England commentary is an additional focus: markets assign roughly a 90% probability to a November hike, contrasting sharply with Reuters-polled economists, who expect unchanged rates until later in 2027 and see the next move as a cut. Remarks from Sarah Breeden, Catherine Mann and other officials this week could help clarify that divergence.

JAPANESE YEN: The yen slipped toward 158.62 yen per dollar.  Markets are close in Japan due to holiday, leaving the focus on news headlines today. The currency remains under pressure from US rate differentials and a market that is unconvinced the central bank will raise rates in a timely manner. Policymaker Sato said in an interview that she supports the idea of raising interest rates in several stages, but the comments did little to move policy expectations. Mainly, the lack of conviction stems from the bank’s recent communications following its split decision to raise rates and the following summary of opinions, which provided little clarity on the timing of the next potential rate hike. However, the minutes did point to a board more favorable to raising rates once more. The greatest near-term upside risk for the currency remains market intervention. Markets are pricing roughly an 8% chance of a hike in October and see 19 bps of tightening by year-end.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie fell 0.21% to $0.6967. Tuesday’s RBA minutes and Thursday’s Australian employment report will test whether further tightening is necessary following four hikes this year. Consensus expects 20,000 additional jobs and an unchanged 4.6% unemployment rate. Further evidence of increasing slack would weaken the case for another RBA hike following September’s increase to 4.60%. Money markets price hike probabilities near 30% for November and 46% for December. The Australian 10-year yield is trading near a 10.5 bps premium to the US 10-year from around 40 bps in mid-September. That dynamic has recently pressured the currency and could continue to do so if the RBA holds rates for the foreseeable future, while the Fed raises rates. This will leave RBA policy expectations to play a large role in price direction.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields moved higher at the front end and lower at the long overnight in relatively light trading. Yields remain below the 24-year highs reached earlier this month, but elevated oil prices continue to complicate the inflation outlook. Friday’s increase in the 10-year nominal yield coincided with a 4 bp rise in the real yield to 2.91% and a 2 bp decline in breakeven inflation to 2.33%. That decomposition points to the real-yield component as the source of the day’s increase, rather than higher market-implied inflation compensation; it does not establish whether policy expectations or term premium drove the move. Inflation and growth data will remain central to the near-term policy outlook. Markets assign an 81% probability to unchanged Fed policy this month. Softer recent inflation and employment data have reduced expectations of an immediate follow-up to September’s hike, even as energy prices leave the subsequent policy path uncertain. Wednesday’s September CPI report is therefore pivotal. The latest Reuters estimate expects a 3.7% headline figure and 2.5% core figure. A stronger reading could bring the timing and frequency of subsequent hikes back into focus, while a softer result would support an October pause and potentially provide relief to global bond markets. Thursday’s PPI, retail sales and jobless claims will add evidence on pipeline inflation, consumer resilience and labor-market conditions. Fed commentary and Wednesday’s Beige Book will also help establish whether policymakers view higher borrowing costs as sufficient restraint or believe additional tightening is required.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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