Markets last week
The rear-view mirror is often clearer than the windshield. We are almost halfway through earnings season so far as companies report for the previous quarter. So far results have been mixed, with US companies generally doing better than companies in Europe. In the US, about 80% of companies have beaten their estimates, with earnings and revenue growth surprising to the upside. In Europe, slightly under 60% of companies have beaten estimates, but earnings have shrunk by 8% year-on-year. Commodity-related sectors have been the biggest driver of this fall in earnings. Whilst revenue growth in the US has surprised to the upside, in Europe it has been particularly weak. Earnings season corroborates the broader indications from the economic data that the US economy is proving more resilient to interest rate hikes than the European economies.
Despite a mixed earnings season, it was a difficult week for equity markets. Investors seem to be punishing companies more for weaker earnings than they are rewarding companies for strong earnings, most likely a result of damaged sentiment, geopolitical risks, high bond yields and elements of the macro backdrop showing deterioration. Throughout the week, global equities fell 1.8%, with US equities faring the worst – falling 2.4% in sterling terms. In the US, the worst-performing sectors were communication services and energy, while utilities was comfortably the best-performing sector. The FTSE All Share Index of UK Equities fared slightly better, falling 1.4%; the worst-performing sectors were real estate and financials, while the best-performing sectors were utilities and materials.
The week began with another significant rise in the 10-year treasury yield, briefly breaking the 5% mark for the first time since the summer of 2007. The situation took a turn, as there were sufficient buyers in the market (including two high-profile and particularly vocal investors) to drive the yield back down to 4.8% for a period. When it made another attempt to reach the 5% milestone, it failed at 4.98%. It seems that 5% was the target that bond investors were looking for to buy treasuries. The 5% target is yet to be tested again, as the yield remained range-bound around the 4.85% level for the remainder of the week.
In China, Xi Jinping announced a new set of stimulus, including extending the budget deficit to 3.8% of GDP – exceeding the traditional 3% limit. This signifies a significant boost in spending, particularly as such mid-year budget adjustments are typically reserved for crisis situations. Clearly, despite the recent stronger-than-expected GDP numbers, Chinese leadership are concerned about the major challenges faced by the Chinese economy. Although Asian stocks reacted positively to the stimulus, the resultant rally was perhaps more lacklustre than authorities would have hoped. Over the course of the week Chinese equities were up 1.7% in sterling terms.
Finally, gold continued to march higher on the back of tensions in the Middle East. Before the conflict escalated on 7 October, gold traded at US$1830, but by the end of last week passed the US$2000 mark to close at US$2006.
The week ahead
Key rate decisions: with the European Central Bank (ECB) done last week, all eyes will be on the US Federal Reserve (Fed) and Bank of England (BoE) in the week ahead.
Tuesday: Bank of Japan (BoJ) rate decision
Our Thoughts: The BoJ will most likely retain its short-term interest rate at -0.1% and uphold the 10-year Japanese government bond yield target at 0%, with an effective upper limit of 1%. The central bank is also likely to maintain its yield-curve control policy during its upcoming meeting, despite the recent sharp rise in Japanese bond yields and the surprisingly hot inflation reading last week.
Wednesday: US Fed rate decision
Our Thoughts: The Fed is likely to maintain interest rates during its upcoming meeting while keeping the door open to further increases. Officials are debating whether the recent tightening of financial conditions will be sufficient to counter robust economic growth and lower inflation. With GDP growing at 4.9% in the third quarter and the trimmed mean personal consumption expenditures (PCE) inflation at 4.0%, there are concerns that inflation may persist. While Chair Jerome Powell acknowledged progress towards the dual mandate of maximum employment and stable prices, he emphasized the need to remain vigilant and make decisions based on incoming data and evolving risks. Financial conditions have tightened due to higher bond yields, which could help combat inflation. Despite some economic concerns, there is a possibility of further rate hikes if inflation remains stubborn.
Thursday: Bank of England rate decision
Our Thoughts: The BoE’s rate decision will be closely monitored to assess its strategy for managing inflation and economic conditions in the UK, influenced by insights drawn from the euro area’s experience with rapidly easing price pressures. The BoE is unlikely to panic at the news that the rate of inflation failed to ease in September, focusing on the bigger, longer-term picture. We would still be minded that the BoE are most likely to keep rates on hold on Thursday.
The numbers for the week
Central banks/fiscal policy
The ECB pauses
As widely anticipated, the ECB made no alterations to its monetary policy or forward guidance. President Lagarde emphasized that this decision was unanimous, indicating a reduction in the previously observed differences of opinion from the September meeting. However, during the press conference, there were some dovish signals; this slight shift in tone should be considered in light of the recent geopolitical risks, rises in bond yields, and in particular the sluggish economic data. Lagarde noted that inflation developments were largely as anticipated, while risks to economic growth leaned towards the downside. When questioned about potential rate cuts, she firmly rejected the idea, deeming it premature.
In summary, these indications suggest that the ECB is content with maintaining the status quo, with the impetus for further rate hikes diminishing, and the tightening cycle likely reaching its peak.
US economy still looks very strong on the back of GDP growth, Manufacturing Purchasing Managers’ Index (PMI) and sentiment indicators
GDP: The US economy grew at an annualised rate of 4.9% last quarter, considerably higher than expectations. 4.9% clocks in at the fastest rate of growth for the US economy since 2021.
Industry: In October, US business activity rebounded, with the S&P Global composite output index reaching a three-month high of 51, signifying expansion. Factory demand increased, and service-sector inflation eased. The manufacturing picture was also positive, moving out of contraction for the first time in five months. Durable goods new orders rose 4.7%, significantly more than the 1.9% rise that economists had expected.
Employment: Weekly initial jobless claims rose slightly more than expected in the previous week to 210k, and rising from 190k week to the week prior. More worrying was the continuing claims data which showed that ongoing jobless claims surged to almost 1.8m, far exceeding expectations. This data indicates that workers are finding it more difficult to find jobs. Could we see a more substantial softening of the labour market in the coming months?
Consumer: Personal spending rose by 0.7% in September, more than consensus expectations and rising from the prior reading for August. Simultaneously, personal income rose 0.3%, falling short of consensus. It seems consumers are living beyond their means and this momentum is unlikely to persist due to the weakening labour market, decreasing excess savings and the cumulative impact of interest rate rises.
Surveys: The final reading of the October University of Michigan Consumer Sentiment Survey came in slightly stronger than expected but has weakened from the September report. Inflation concerns persist and consumers are concerned about a reduction in the standard of living and falling real disposable income.
Unemployment ticks up ahead of the BoE rate decision this week
Employment: The claimant count ticked up from 3.9% to 4.0% in September.
Industry: Business conditions improved marginally in October but remain in contraction. UK Manufacturing PMI came in at 45.2, beating economists’ expectations and an improvement on the September reading of 44.3.
Business activity weak in Q3
Industry: PMIs have fallen significantly across Europe in Q3, showing how business activity has meaningfully contracted. Preliminary data for October released on Thursday showed that eurozone Manufacturing PMI had fallen to 43 – well below consensus expectations. German Manufacturing PMI came in a 40.7, which, although slightly better than the September reading, is still well into contractionary territory.
Surveys: In Germany, the IFO Institute’s Business Climate and Expectations Indices rose, surprising to the upside and indicating a slight improvement in business sentiment. The IFO Business Climate Index rose from 85.7 in September to 86.9 in the October reading. The IFO Expectations index rose from 82.9 in September to 84.7 in the October reading.
Hotter than expected inflation in Japan
Japan: Core inflation (which excludes fresh food) rose to 2.7% year-on-year in September, above the consensus forecast. Headline inflation rose to 3.3% a year on from 2.8% in the prior reading. Although the BoJ have been trying to create a durable level of inflation through their negative interest rate and yield curve control policies, inflation surprises such as this will but the central bank on guard for further inflation overshoots. Policy makers are due to meet on Tuesday this week.
China: In September, industrial profits continued their upward trajectory for the second consecutive month compared to the same period in the previous year. Profits increased by 11.9%, following a substantial 17.2% surge in August. This trend may well continue as government stimulus measures, such as an additional 1trn yuan injection into the budget, start to take effect. It’s important to note that while some sectors are experiencing a robust rebound, the overall economic recovery remains uneven, and certain parts of the economy – in particular the real estate sector – are still facing vulnerabilities.
Gold passes the psychological US$2000 mark while oil softens
Global oil markets have been closely monitoring the situation in Gaza due to its potential impact on global crude supplies, particularly given the Middle East’s significance in the oil market. Although the conflict continues, oil prices, particularly Brent, dropped last week, falling below $90 a barrel. Concerns about interruptions in regional crude supplies in the wider region have been marginally alleviated for the time being. Brent finished the week down 1.8% at US$90.48bbl, while WTI Crude fell 3.6% to US$85.54bbl.
The safe haven of gold was more favoured last week and continued to march higher on the back of these tensions. Before the conflict escalated on 7 October, gold traded at US$1830, but by the end of last week passed the US$2000 mark to close at US$2006.