US confidence falters, but China gains strength By Reuters

A look at the day ahead in the US and global markets from Mike Dolan

An unexpected drop in U.S. household confidence this month and growing anxiety about jobs have spurred aggressive interest rate cut bets again, dragging Treasury yields, the dollar and stock futures lower at the open on Wednesday.

Rate futures, which are fueled primarily by employment signals from Tuesday’s consumer survey, now price the Fed’s rate in by about 40 basis points at its next meeting, just days after the November election. That now raises the odds of a half-point cut rather than a quarter-point to more than 50%.

After a decent auction of new securities late yesterday, two-year Treasury yields are within touching distance of 3.5% for the first time in two years. A “bullish steepening” of the 2-10 year yield curve – which sees two-year yields fall more than 10-year yields – pushed the recently positive gap above 20 basis points for the first time since June 2022.

The constellation sapped the , which is now a hair's breadth from its low for the year, and the surprise disruption to the growth outlook has dragged U.S. stock futures down from record highs before Wednesday's close.

The cat among the pigeons came from the Conference Board's latest consumer survey, which revealed the biggest drop in confidence in three years in September amid growing fears about the job market.

The share of households saying there is “plenty of work” fell to the lowest level since March 2021. The survey’s so-called labor market differential, derived from data on respondents’ views on whether work is plentiful or hard to come by, fell to 12.6, the lowest level in three and a half years.

And the rush to ease interest rates gained momentum around the world; China followed Tuesday's wave of monetary easing, which included mortgage rate cuts and incentives for stock purchases, with a sharp 30 basis point cut in its medium-term lending rate.

Chinese stocks and the yuan added to Tuesday's gains, with the latter hitting another 16-month high, on fresh hopes that authorities may finally be ready to give the faltering economy a big boost.

While Beijing's latest measures have so far benefited from the doubt, most foreign investors believe that credit easing will only have a chance of reversing the demand outlook and the housing crisis if it is combined with more serious fiscal measures to address the housing situation. A necessary but not yet sufficient measure, in the jargon of economic experts.

While the yuan's rise following deep rate cuts seems odd, it appears to be more due to growth hopes and stock market stimulus. Chinese government bond yields also rose.

But the real estate market is not China's only concern.

Beijing on Wednesday urged the United States to stop “unreasonable suppression” of its companies, in response to American proposals to ban Chinese software and hardware from vehicles on its roads due to national security concerns.

Few places would welcome a recovery in Chinese demand more than Europe, where this week's September business surveys in Germany and across the bloc revealed an alarming relapse of business and manufacturing into contractionary territory.

So much so that money market bets put the odds of a third rate cut of the year by the European Central Bank next month above 50% for the first time. With the euro flirting with a year-high of $1.12 against a declining dollar, there is increasingly room for further cuts.

Moreover, an ECB study published on Wednesday said wage pressures are easing across the euro zone, driven largely by lower additional compensation paid on top of negotiated wages and likely contributing to a further moderation of inflation.

Sweden's central bank is not sitting on its hands, with the Riksbank cutting its policy rate by another quarter point to 3.25% on Wednesday – the third time this year – adding that if inflation prospects remain favourable it could ease policy at a faster pace in the coming months.

Even though the Reserve Bank of Australia held firm this week, news that Australian headline inflation fell back into the central bank's target zone last month will have been encouraging there too.

Meanwhile, the Swiss National Bank is set to cut interest rates again on Thursday.

Meanwhile, the latest polls by Bank of England hawk Megan Greene continued to suggest that the BoE would not rush into further monetary easing. And the pound continues to rise.

Meanwhile, the latest US election polls continue to point to a tight race, although the most recent Reuters/IPSOS rolling poll indicated a widening gap in favour of Democrat Kamala Harris, with 47% support versus 40% for her rival Donald Trump.

In European business news, SAP shares fell 3.6% after a report said the German software developer was under investigation in the United States for alleged price fixing.

Key developments that should provide further direction to US markets later on Wednesday:

* US new home sales in August

* Federal Reserve Governor Adriana Kugler speaks

* US corporate earnings: Costco (NASDAQ:), Micron technology (NASDAQ:)

* US Treasury sells $70 billion in 5-year bonds and auctions 2-year floating rate bonds

* United Nations General Assembly in New York

(This story has been corrected to say there is more than a 50% chance of a half-point cut, not 80%, in paragraph 2.)

(By Mike Dolan; editing by Toby Chopra; [email protected])