As optimism made a small recovery on the US economy, the US Dollar and stock markets made minor but fragile advances.

1. In quiet day in the market yesterday, there was a natural minor rebound against last week’s pessimism on the Fed being behind the curve on rate cuts and on the prospect of a recession hitting the US economy. Major US stock market indices saw gains and the US Dollar firmed, while US treasury yields rose slightly. However, these developments look very fragile and prone to reversal in the direction of longer-term trends.
2. In the Forex market, the New Zealand Dollar has been the strongest major currency since today’s Tokyo open, while the Japanese Yen has been the weakest, although the movements are so small they are probably not significant. There is a valid long-term trend against the US Dollar in the USD/JPY currency pair but the EUR/USD currency pair has fallen by more than 3 times the average true range of the long-term daily chart, indicating it is probably time for bulls to give up there.
3. US Treasury Secretary Janet Yellen said over the weekend that she sees “no red lights flashing” on the US economy. It is clear she is trying to stave off increasing pessimism over inflation, and this may have worked a little yesterday, but will be tested today.
4. New fears are arising that China may be falling into a deflationary spiral, which could be seriously damaging to the global economy given China’s large economy and role as manufacturer to the world and importer of raw materials. China is seeing a stream of data pointing to weak consumption and investment demand, and its stock market has declined over the summer.
5. Tomorrow brings the release of US CPI (inflation) data which will be important for the market. Annualized inflation is expected to fall from 2.9% to 2.6%.
6. Most commodities, especially softs, are looking weak. However, Gold remains relatively bullish as it trades only about 1 day’s average range below its record high above $2,500.
7. Today will see the release of US Claimant Count Change data (unemployment claims), and a minor speech by the Governor of the Bank of Canada.

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