Stocks Shrug Off US-China Truce

MACRO FRAME

With global monetary policy skewing toward a renewed tightening cycle, US-China talks take center stage as markets navigate elevated oil prices.

STOCK INDEX FUTURES

Equity index futures fell lower overnight, as renewed Middle East escalation pushed Brent crude back above $100 per barrel, while a potential US diesel-export ban added to energy-market uncertainty. The resulting inflation impulse, together with resilient business activity, prompted a sharp repricing of further Fed tightening: markets now assign roughly a 65% probability of at least another 25-basis-point hike next month, versus about 50% a day earlier. New York Fed President Williams reinforced the message, saying another increase this year would be reasonable. The 30-year Treasury yield rose to its highest level since 2004, creating a more challenging discount-rate environment for equities and weighing most heavily on AI growth names that have led the Nasdaq to recent records. Meta, Nvidia, Marvell, and Intel all traded lower premarket. Meanwhile, the US and China extended their trade truce to January 10, avoiding an immediate tariff escalation but leaving a short runway to negotiate a more durable deal ahead of the Trump-Xi summit. The near-term market setup remains ongoing US-China trade talks and rising geopolitical, energy, and interest-rate risk. A durable decline in crude or concrete Middle East de-escalation would ease the inflation and rates pressure; absent that, elevated long-term yields are likely to remain a headwind for high-multiple equities and energy-sensitive consumer industries.

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 overnight to 101.272, following moves in oil and as traders increased bets of near-term interest rate hikes. Money markets are priced for 35 bps of tightening by year-end, but have notably shifted odds of an October hike to 65% from 55% following the release of September’s strong PMI data. However, the recent move in the dollar appears a bit stretched from fundamentals, especially against the euro, leaving the dollar susceptible to a modest pull-back.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

EURO: The euro fell 0.11% to $1.13687. French, German, and Eurozone PMI data released on Wednesday are constructive or the euro because they combine a meaningful upside surprise in activity with renewed price pressure, both of which make it harder for the ECB to rule out another hike. Comments from ECB officials have been hawkish, supporting prospects for a potential October rate hike, which is priced at 52%, while markets are fully priced for a hike in December. Money markets expect the ECB to hike as much as the Fed in the next 12 months, pricing in 89 bps of tightening.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling is 0.11% lower at $1.3223, marking a three month low against the dollar. Money markets are priced for nearly four rate hikes over the next 12 months from the Bank of England, and see a roughly 75% chance of a move in November. However, that pricing appears at odds with the jobs market, which has shown weak demand for labor amid its recovery over the last year.

JAPANESE YEN: The yen is 0.26% weaker at 158.70 yen per dollar, approaching its September low at 160.17. Japanese markets are open following a holiday break. Japanese Finance Minister Katayama said the principles underpinning the US-Japan intervention remain intact. However, sentiment regarding the currency has been damaged after the BOJ underwhelmed the investors following its divided decision to raise rates and Governor Ueda’s unconvincing press conference. Ueda said that underlying inflation is approaching 2%, and that the bank’s focus has shifted to guard against an inflation overshoot. Still, Ueda talked down back-to-back hikes or 50 bp increases, saying those moves were reserved for situations where inflation is extremely high and exceeding target. The two dissents come from the new, Taikaichi-appointed members, who were seen as being added to the board to influence policy in her favor. For the yen, the longer-term path appears biased toward gradual appreciation, though with real wages being low rather than negative, the path for policy could lag expectations.

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 is little changed at $0.7032, near its lowest level since early-August. Despite dollar strength, the hawkish outlook for the Reserve Bank of Australia is offering the currency support to remain above $0.70. Australian labor data showed the economy added 39,500 jobs in August, well above forecasts for a gain of 20,000. The unemployment rate edged higher to 4.6%, a five-year high as more people entered the labor force. RBA Governor Michele Bullock has recently said that unemployment between 4.5% and 5.0% is needed to help loosen the labor market inflationary pressures. Still, inflation pressures extend well beyond the labor market. Markets imply a 95% chance the RBA will raise rates to 4.60% when it meets next week. The Commonwealth Bank of Australia and ANZ joined the other two Big Four Australian banks in expecting a rate hike this year. ANZ is also expecting an additional move to 4.85% in November. Q3 inflation figures will continue to serve an outsized role in determining RBA policy and given that the September policy meeting is a month before the release, policymakers could wait until that data arrives before making any decisions.

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 lower across the curve in a flattening move, with strong buying coming in during the morning. The 30-year Treasury yield rose above 5.44% on Wednesday, its highest level since 2004, extending a long-duration selloff driven by resilient growth, higher energy prices, renewed Fed-tightening expectations, and rising fiscal-financing demands. The move is not solely a policy-rate story: while short maturities mainly reflect the expected Fed path, the 30-year yield embeds the compensation investors require for inflation uncertainty, heavy future Treasury supply, and the risk of holding duration over a much longer horizon. Thus far, markets have absorbed the rise in yields because nominal growth, corporate profits, and AI-related investment remain robust. Evidence of weak Treasury-auction demand, deteriorating market liquidity, a sharper rise in mortgage spreads, or further acceleration in inflation expectations would signal that risk is becoming more material. Recent comments from several Fed officials have also been hawkish, while PMI data pointed to continued strength in US economic activity.

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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