Markets last week
The FTSE All World Index finished the week up 0.6% in GBP terms. It was an uncertain end to an overall fantastic November for equities as the global market fell through most of the week, only to recover in the last couple of days with no strong moves in either direction.
International equities have performed strongly throughout November in local currency terms, but the strength of the pound during the month has eroded much of the gains. This trend in the foreign exchange market continued last week, with the pound appreciating 0.8% vs. the dollar, and 1.3% vs. the euro. The global equity market was up 8.2% in November in USD terms, but only 3.6% in GBP. Last week US equities gained 0.8% in USD, but only 0.1% in GBP.
A strong pound is also a headwind for the UK large cap FTSE 100 market, as the index constituents tend to have a large proportion of international earnings that then need to be converted back into sterling. The FTSE 100 was up 2% in November, whilst the mid-cap UK market was much stronger, finishing the month up 6.5%. Hong Kong equities were an area of weakness last week, falling -5.1%, taking year-to-date losses to -16%.
November was an excellent month for bonds, particularly US Treasuries, and last week was no exception. The US 10-year Treasury yield fell from 4.47% at the start of the week to 4.2% by the end of the week. It has been a remarkable period for the Treasury market as the 10-year yield has fallen from a peak of 5% in mid-October.
The rally in Treasuries was kicked off by a surprisingly dovish tone from US Federal Reserve (Fed) chair Jerome Powell during the 1 November press conference, and strengthened by disinflation and evidence of a weakening economy. Last week it was the words of Fed Governor Christopher Waller that spurred on the Treasury rally when he said, “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%. I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy.” Chairman Powell spoke on Friday and struck a more hawkish tone heading into December, clearly concerned about the easing of financial conditions in the last month.
Gold had a very strong week, closing up 3.6% at US$2072.22, passing the all-time high of US$2050.28 reached earlier this year. In recent years, gold has served its traditional role by preserving purchasing power amid inflation and navigating challenges like rising real interest rates. The case for gold and gold-related investments remains strong, with the US rate cycle nearing its end, economic risks rising and elevated geopolitical tensions.
US GDP growth for the third quarter was higher than originally estimated, coming in at 5.2% – further evidence of the resilience of the US economy this year. Inflationary pressures continued to subside; core personal consumption expenditures, a key inflation metric for the Fed, came in softer than expected. The US consumer data for October was in-line with consensus and showed a drop-off in spending. The deceleration in consumer spending suggests that the robust recovery in the aftermath of the pandemic is diminishing. We believe this is likely to continue next year as the ‘long and variable lags’ of interest rate rises take hold and as excess savings are depleted.
Finally, inflation in the eurozone continued to fall, with the estimated data for November showing a downside surprise for the third consecutive month. Core inflation also surprised to the downside, falling from 4.2% to 3.6%; well below the consensus. The progress on services inflation stood out, falling from 4.6% to 4%, a significant shift in momentum within this crucial category. The fall in inflation combined with weak credit momentum, purchasing managers’ index, and sentiment all show the relative weakness of the European economies.
The week ahead
Thursday: EU GDP
Our thoughts: The eurozone economy is expected to have shrunk in the third quarter. The recent economic data from the eurozone has shown more significant weakness than other major economies.
Friday: Employment data
Our thoughts: The US labour market has been a key area of resilience this year. Recent data, however, has shown some cracks beginning to show, particularly in the continuing claims data – suggesting that jobs are becoming more difficult to find. This increase in continuing claims implies a rise in unemployment. Unemployment remains low and economists expect the unemployment rate to remain unchanged at 3.9%. We expect to see some cooling.
Friday: University of Michigan Sentiment Index
Our thoughts: This key survey of consumers in the US is expected to show some improvement for the run into Christmas after four months of decline. Consumers have been particularly concerned about inflation and the ensuing cost of living crisis. This is still likely to be the case, however the fall in gasoline prices may well have helped release some pressure on strained household budgets.
The numbers for the week