MORNING BID EUROPE-Milder inflation seen setting up rate cuts

A look at the day ahead in European and global markets from Tom Westbrook

European inflation figures are due on Tuesday and the risk is to the downside, which will reinforce bets that the European Central Bank cuts interest rates later in the month.

Already this week Germany's September inflation came in below forecasts and, at 1.8% year-on-year, was the lowest since 2021.

Inflation is also easing in France, Italy and Spain and markets moved to fully price in an October rate cut after President Christine Lagarde said on Monday the trend will be taken into account at the next policy meeting, which is on Oct. 17.

Traders have another ECB cut priced in for December and have been selling dollars on the assumption that inflation is under control globally and that U.S. rates have the furthest to fall.

The euro has been unable to sustain a break of $1.12, but is holding above $1.11 while the yen and yuan have been the main movers in currency markets.

The yuan was flat at 7 per dollar in offshore trade with Chinese markets shut and holidays in Hong Kong and South Korea further lightening Asia session trade. The yen steadied at 143.89 per dollar.

Earlier, in New York, U.S. yields bounced when Federal Reserve Chair Jerome Powell said the policy committee was not in a hurry to cut rates, though that will unwind quickly if data due on Tuesday and through the rest of the week turns soft.

The U.S. manufacturing ISM has been parked in contractionary territory for months, even though the economy has hummed along, but focus will be intense on the employment index and the August job openings figures.

If there are signs of weakness, traders will be ramping back up bets on a 50-basis-point Fed cut for November. Current market pricing is for about a 36% chance of a 50 bp cut, according to CME FedWatch, down from 53% before Powell's remarks.

Israel's widely expected ground invasion of Lebanon appeared to be getting underway as its military said troops had begun "limited" raids against Hezbollah targets in the border area.

Oil prices climbed very slightly.

Broader trade in Asia was lightened by holidays, though with China's soaring markets shut investors pared some of the exuberance about a recovery in the world's second-biggest economy and iron ore miners in Australia, for example, fell.

Asia's factory activity weakened in September as soft Chinese demand and global economic uncertainty pointed to a challenging outlook, private surveys showed.

Shigeru Ishiba was set to be voted in by parliament as Japan's next prime minister, while upbeat retail sales data in Australia gave a slight boost to the Aussie dollar.

Key developments that could influence markets on Tuesday:

- Eurozone inflation

- U.S. job openings, ISM survey

(Editing by Muralikumar Anantharaman)