Fed rate cut optimism lifts sentiment, yen falls amid political uncertainty

Stocks rose and the dollar wobbled on Monday after dismal US labour data sealed the case for an interest rate cut this month, while the yen fell as investors girded for uncertainty in Japan following the resignation of Prime Minister Shigeru Ishiba.

Gold prices held near a record-high while US Treasury yields hovered close to five-month lows after data showed the world's largest economy created far fewer jobs than expected in August, with markets factoring in chances of a jumbo rate cut.

Much of the focus last week was on elevated long-end bond yields across the globe as investors fretted about the state of various countries' finances from Britain and France to Japan.

Some of those worries could return after Japan's Ishiba resigned on Sunday, while France could be looking for its fifth prime minister in three years as Francois Bayrou faces a confidence vote on Monday, which he is expected to lose.

The political uncertainty gripping Japan, the world's fourth-largest economy and France, the euro zone's second-biggest economy, will likely limit any exuberant reaction to the prospect of rate cuts from the Federal Reserve.

European futures advanced 0.45 per cent, while S&P 500 futures pointed 0.08 per cent higher on Monday after a volatile session on Friday where the index hit a record high but then closed 0.3 per cent lower.

The yen fell across the board and was last 0.6 per cent lower at 148.39 per dollar, while the Nikkei surged 1.8 per cent, just shy of its recent record-high. The benchmark 10-year Japanese government bond (JGB) yield was flat at 1.57 per cent.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.4 per cent higher. Hong Kong's Hang Seng index gained 0.35 per cent.

The spotlight will be on who replaces Ishiba, with investors fretting that an advocate of looser fiscal and monetary policy, such as Liberal Democratic Party veteran Sanae Takaichi, who has criticised the BOJ's interest rate hikes, could take the helm next.

"The markets are going to be framing this around what it means for fiscal policy, inflation and the BOJ's response," said Kyle Rodda, senior financial market analyst at Capital.com.

Rate cuts are here

Investor attention this week will be on the US inflation report on Thursday to gauge the risk of rising prices that could help temper some of the enthusiasm for a larger rate cut.

The US two-year yields, which are tied to interest rate policy, were 2 basis points (bps) higher at 3.527 per cent, near the five-month low of 3.464 per cent hit on Friday.

Traders have fully priced in a 25 bps cut later this month with an 8 per cent chance of a jumbo 50 bps rate cut, the CME FedWatch tool showed. They are anticipating 68 bps of easing by the end of this year.

"The Fed has more than enough reasons and will cut by 25bps ... with another two within six-months," said George Boubouras, head of research at K2 Asset Management.

"US cash rates are notably higher than other developed markets (and) given the resilient and robust US economy, lower cash rates are now required. Fed commentary of further rate cuts will be supportive, without this equity markets will be weaker."

In the currency market, the euro eased a bit to $1.1712 after surging 0.6 per cent on Friday, while sterling last fetched $1.3495 after a 0.5 per cent rise on Friday.

In commodities, gold prices were at $3,588 per ounce, just shy of the $3,600 milestone. Gold is up 37 per cent this year after rising 27 per cent in 2024.

Oil prices climbed after OPEC+ agreed over the weekend to raise output at a slower pace from October on expectations of weaker global demand. Brent crude and US West Texas Intermediate crude rose more than 1 per cent each.