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US financial markets reopened after the Labor Day holiday, facing concerns over another unwinding of yen carry trades ahead of Friday’s US monthly jobs report. Following the market’s adverse reaction to the FOMC and BOJ meetings on July 31, investors are cautious about the BOJ meeting on September 20, just two days after the Fed is expected to deliver its first rate cut. The JPY appreciated by 1% overnight, while AUD, NZD, and GBP depreciated by 1.2%, 0.7%, and 0.3%, respectively. The yen’s strength was driven by a document submitted by Bank of Japan Governor Kazuo Ueda to Japanese lawmakers, which reaffirmed the commitment to keep raising interest rates if the Japanese economy meets the central bank’s economic forecasts through FY2025. Ueda attributed the market volatility in July-August to US recession fears, spurred by a rising unemployment rate.
The Fed flagged the primary goal of its telegraphed rate cut as preventing a further weakening in the US labour market. As a result, markets should be vulnerable to today’s US JOLTS report, with consensus expecting job openings to decline to 8100k in July from 8184k in June. On Friday, expectations are for US nonfarm payrolls to stay below 200k and the unemployment rate to above 4% in August, supporting the Fed’s preference for a 25 bps cut. US disinflation expectations also lowered the US Treasury 10Y bond yield by 7.3 bps to 3.83%, more than the 5.4 bps decline in the 2Y yield to 3.86%. New research from the San Francisco Fed projected shelter inflation, the most significant contributor to US inflation, to continue declining to as low as 2% by the end of 2024 before returning to the pre-pandemic average of 3.3% by spring 2025. Markets are assessing how far bond yields can fall, particularly in light of San Francisco Fed President Mary Daly’s estimate of an inflation-adjusted neutral interest rate as high as 1%.
US equities returned from the US Labour Day holiday with their worst sell-off since August 5. The Dow, S&P 500, and Nasdaq Composite Indices fell by 1.5%. 2.2%, and 3.3%, respectively. S&P closed at 5529, below the 5560-5650 range it had traded for the previous ten sessions. Tech sector worries dragged the Nasdaq beneath 17500 for the first time since August 14. Adding to the caution, the US ISM Manufacturing PMI index missed expectations with an increase to 47.2 in August, below the 47.5 consensus. Although the factory index improved from 46.8 in July, it held below the breakeven 50 level for a fifth month. Notably, new orders declined to 44.6, its weakest level since May 2023, dragging the production index to 44.8, its lowest since May 2020. Tomorrow’s ISM Services PMI matters more to the US economy and is expected to moderate slightly to 51.2 from 51.4, supporting a soft landing outlook.
Quote of the day
”Words which do not give the light of Christ increase the darkness.”
Mother Teresa
September 4 in history
In 2016, Pope Francis declared Mother Teresa of Calcutta a saint of the Roman Catholic Church. 
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