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Marketmind: Spiky quarter ends in uneasy market calm

[September 29, 2023] A look at the day ahead in U.S. and global markets by Mike Dolan

With one eye on a key U.S. inflation update for August later on Friday, world markets limped to the end of a poor third quarter and clawed back some of their worst losses.

A partial U.S. government shutdown, now on the cards from Sunday as last ditch attempts in Congress to avert it look set to fail, hardly paints a bright backdrop to the final three months of 2023.

But the worst of the selling in bonds and stocks this week, which may have been partly related to the quarter end and a heavy U.S. Treasury auction schedule, seemed to ease somewhat.

It's hard to identify any particular reason for the mini-bounce, but the circular nature of the week's oil, bond, dollar and stock market moves seemed to reverse at bit.

U.S. crude oil prices fell back from the year's highs above $95 per barrel - and hovered just under $92 on Friday as traders looked to next week's ministerial meeting of the Organization of the Petroleum Exporting Countries and allies for further clues on tight global energy supplies.

That helped take the heat out of Treasury yields. Ten-year yields fell back from fresh 16-year highs, just as a heavy week of new government debt sales totaling more $130 billion came to an end with Thursday's underwhelming $37 billion auction of oft-unloved 7-year notes.

At 4.53% on Friday, the 10-year benchmark was some 15 basis points off Thursday's peak and two-year yields fell back to their lowest since Sept. 18.

The recoil in oil and bond yields in turn dragged the dollar back down too - with the index now off more than 1% from Wednesday's high for the year.

And stocks breathed a sigh of relief too.

Wall Street indexes managed a second day of gains on Thursday and S&P500 futures were about 0.5% higher ahead of the open. The VIX volatility gauge fell back sharply to 16.5.

World stocks captured by MSCI's all-country index also broke a 9-day losing streak on Thursday and were up for the second day as the week closed out ahead of China's Golden Week break next week.

Some optimism from Beijing about a possible year-end summit between President Xi Jinping and U.S. President Joe Biden helped. U.S. and China are discussing a possible trip to Washington by Xi's top economic-policy aide, Vice Premier He Lifeng, the Wall Street Journal reported, and this could pave the way for Xi's trip to the U.S. in November.

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 28, 2023. REUTERS/Brendan McDermid/File Photo

There was further good news on the European inflation front. Inflation in the euro zone fell more than forecast to its lowest level in two years in September, suggesting the European Central Bank's diet of interest rate hikes is working and may now end.

The Federal Reserve's favored PCE gauge of inflation is due to be updated for August later on Friday and, just like the consumer price report, is expected to show an uptick in the headline rate of inflation while core rates subside further.

Although Fed chief Jerome Powell turned down the chance to address the policy outlook at an event late on Thursday - something many observers reckon may be telling in itself - the noises from his colleagues continued to be equivocal about the chances of another rate rise this year.

Citing possible economic data outages due the looming government shutdown, Richmond Fed boss Thomas Barkin said it's not yet clear to him what the central bank needs to do on monetary policy into the end of the year.

"It would be hard to figure out what's actually happening in the economy without the jobs data," he said, referring to possible delays to next week's employment report.

In corporate news, sportswear giant Nike lifted the mood. Its shares surged 8% before today's bell after the firm topped Wall Street estimates for first-quarter profit as higher prices for its sneakers and apparel offset a hit from waning demand and persistent cost pressures.

In Hong Kong, shares of Nio jumped 9% after Reuters reported, citing sources, the Chinese electric vehicle maker is exploring investment and tech alliances with Mercedes-Benz.

Key developments that should provide more direction to U.S. markets later on Friday:

* US August PCE inflation gauge, personal income and spending. Chicago Sept business surveys, final Sept reading of University of Michigan's consumer sentiment survey

* St. Louis Federal Reserve Interim President Kathleen O'Neill Paese speaks, New York Fed President John Williams

* U.S. Treasury auctions 7-year notes, 4-week bills

* U.S. corporate earnings: Carnival

(Editing by Toby Chopra)

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