* Dow, S&P 500 close at record highs as markets weigh Fed Chair comments

* Dollar gains as Powell adopts relatively hawkish tone on economy

* Fed sees no ‘hurry’ to cut rates as confidence in economy grows

* Oil slumps 17% in Q3 as Middle East conflict offset by slowing demand

* ECB’s Lagarde says ECB getting more confident of taming inflation

FX: USD bounced back intraday on Powell’s comments as he talked up the economy and expressed confidence on a soft landing. He stressed the Fed are in no rush and the FOMC baseline is two more cuts this year totalling 50bps. The dollar index continues to trade around the December long-term low at 100.61 and the 200-week SMA just below.

EUR finished in the red after trading above 1.12 early in the session. Powell caused the major to sell off as he said the US job market remains solid and that risks are two-sided. The euro was also not helped by downside surprises in German and Italian CPI, after Friday’s softer French and Spanish price data. This comes ahead of the region’s inflation data today.

GBP pulled back below 1.34 in cable on USD strength. Q2 GDP was revised marginally lower while there was more solid housing data early in the session. Resistance looks relatively strong around the 1.3430 zone.

USD/JPY moved higher after Friday’s volatility saw a 440-pip intraday move. That came after the LDP election and the swing between the dovish initial winner of the first round vote, and the eventual victor, Ishiba. He is seen as wanting the BoJ to continue hiking rates, so bullish yen, though wires had some relatively dovish comments from the new leader during the day. We note speculators now hold the biggest net JPY long position since 2016.

AUD made fresh cycle highs at 0.6942 before paring gains. The recent China stimulus measures are being touted as a “whatever it takes” moment by some China watchers. There is a big area of support/resistance around 0.6899/71. NZD/USD also finished below fresh peaks of 0.63378, with the December 23 high of 0.6369 currently acting as resistance. USD/CAD continued to bounce off the August lows around 1.3436. Crude was fairly quiet considering the geopolitical unrest in the Middle East.

US Stocks closed mildly firmer to close the quarter. The S&P 500 added 0.42% to settle at 5,762. The tech-laden Nasdaq 100 gained 0.26% to finish at 20,060. The Dow closed 0.04% higher at 42,632. Outperformance was seen in Energy, Communication Services, and Real Estate, while Materials, Consumer Discretionary and Staples underperformed. The benchmark S&P 500 rose 5.53% in the third quarter and is up for four straight three-month periods. It’s the longest win streak since Q4 2021 when the index moved higher for seven quarters in a row. Today was the 43^rd record close in 2024 with the blue-chip index posting its best September since 2013, with five consecutive months of gains.

Asian stocks: Futures are mixed. Asian stocks were also varied to kick off the week with China surging and Japan tanking. The ASX 200 saw gains on commodity-related sectors. They benefitted from a jump in metal prices after the China policy measures. The Nikkei 225 underperformed hugely on yen strength and the Ishiba win. The Shanghai Composite and Hang Seng both rallied again strongly after 15% gains last week. Mixed PMI data didn’t dent the stimulus party ahead of the National holiday week. The mainland index is on course for its biggest gain since 2015.  

Gold fell 1% as Powell cautioned against big rate cuts. The dollar and yields moved higher. The precious metal made record highs last week at $2685. Bugs have driven gold to its biggest quarterly gain since early 2016.

Day Ahead – Eurozone inflation

Consensus is looking for annual headline CPI to rise to 2.0%, down from the prior 2.2%. That would be at the ECB target for the first time since June 2021. Core is likely to pull back to 2.7% from 2.8.  Energy prices are helping bring down the headline. Services inflation may decline after the French Olympics boost last time, though they are still elevated around 4%.

Ahead of the release, metrics from Germany, France, Italy and Spain have printed notably lower than expected. That means there are downside risks to the data as the consensus is now stale. We could even see headline figures below the 2% target. This should not come as a “big surprise” to the ECB after President Lagarde referred to it in her recent press conference.

Chart of the Day – EUR/USD stalls at 1.12 again

The euro has done remarkably well versus the dollar recently, considering the poor and disappointing data out of the region. Last week’s PMIs figures were subdued again with France also now joining Germany in dipping into contractionary territory. Inflation data is easing too, which has seen markets virtually bake in another 25bps rate cut by the ECB later this month. In fact, traders now price in six consecutive 25bps rate reductions. But policy makers are still split, even though President Lagarde said yesterday she seemed more confident about easing policy after those recent survey indicators.

The flip side of the major has seen the dollar hold around recent lows, with Powell helping underpin support with his recent more hawkish comments.   The key pivot level is 1.1139. The 21-day SMA sits below at 1.1066 with a near-term Fib retracement level at 1.1062. Softer than expected inflation data could see the euro breakdown in the near-term.