Markets last week
In some years, November has marked the beginning of a year-end rally, where stock markets tend to perform well as investors position themselves for the holiday season and assess their portfolios. Of course, this isn’t always the case and November has also seen volatility and exogenous market shocks. Last week, however, markets kicked off the new month with a bang. Global equities were up 3.3%, as measured by the FTSE All World TR Index. The US market led the way returning 3.9%, European equities finished up 3.4% and the UK market delivered 2.4%.
In the US, information technology was the best performing sector by some margin. The sector earnings have been significantly better than the broader market with 94% of technology companies beating analyst expectations vs. 82% for the wider market. Materials and utilities were the worst performing sectors, both of which have underperformed the broader market in terms of the proportion of companies beating their earnings estimates. In the US earnings season has been better than in Europe where – compared to 82% for the US – only 58% of companies are beating their estimates. Simultaneously, whilst revenue and sales growth are positive in the US, in Europe it is negative clocking in at -8.2% year-on-year (it rises to -0.7% ex-energy) and earnings growth is -7.4%. Intriguingly it was particularly in the US where investors were disproportionately punishing companies for missing their estimates.
It was also a positive week for bond markets. Yields across the fixed income complex fell as bond prices rose – there is a reverse relationship between bond yields and bond prices. The US 10-year treasury yield, having been as high as 5% in recent weeks, fell from 4.88% at the start of the week down to 4.57% by the market close. It was also a positive week for UK government bonds, the 10-year gilt yield fell from 4.51% to 4.29%. Corporate bonds also performed well benefitting from the fall in yields and a narrowing of credit spreads. Credit spreads are the additional yield pick-up from taking on further credit risk often through lending to the likes of corporates. Last week US and European high yield (companies with lower credit ratings) spreads tightened quite significantly. European high yield spreads tightened over the course of the week from 4.91% to 4.74% and US high yield spreads tightened from 4.34% to 3.95%.
It was a big week for central banks as the Bank of Japan (BoJ), the Federal Reserve (Fed) and the Bank of England (BoE) had their monetary policy meetings. Whilst the Fed and BoE left policy unchanged the BoJ surprised markets with a further adjustment to their yield curve control policy. We discuss central banks in more detail below.
For the first week in four gold dropped, having recently surpassed the US$2000 mark. It fell from US$2006 at the start of the week, just holding on above US$2000, finishing the week at US$1992.65. For the second consecutive week oil fell. Brent finished the week at US$84.89bbl and West Texas Intermediate (WTI) at US$80.51bbl down 6.2% and 5.9% respectively.
The week ahead
Things quieten down after a busy couple of weeks of central bank activity.
Friday: UK Gross Domestic Product (GDP)
Our thoughts: UK GDP data for the third quarter will be released on Friday with the UK economy most likely shrinking during the period. UK economic data has been relatively weak of late as high interest rates have begun to bite.
Friday: UK industrial and manufacturing production
Our thoughts: The production data for September will be released on Friday. Given the weaker than expected reading for August this data will be a key indication of the negative momentum for UK industry. The prior reading for August showed a fall in manufacturing of 0.8% whilst industrial production fell 0.7%.
Friday: University of Michigan Sentiment Index
Our thoughts: The preliminary reading of the University of Michigan Sentiment Index for November is likely to indicate continued pessimism as high inflation erodes people’s quality of life and higher interest rates start to take their toll on the consumer. Economists expect the sentiment index to fall from a value of 63.8 to 63.5, whilst inflation continues to be a key concern for consumers.
The numbers for the week
Central banks/fiscal policy
A busy week for central bankers
It was a big week for central banks as the BoJ, the Fed and the BoE had their monetary policy meetings. Whilst the Fed and the BoE left policy unchanged the BoJ surprised markets with a further adjustment to their yield curve control policy.
Firstly, the BoJ; the recent adjustments made to yield-curve control (YCC) is indicative of a move closer to discontinuing it, potentially enabling bond yields to surpass 1%. The BoJ has revised the reference range for the 10-year Japanese government bond from a range of +/-0.5% to a fixed 1%, while eliminating the strict upper limit. In theory, this implies that yields could exceed 1% without direct intervention, although there remains uncertainty regarding how much upward movement in yields the BoJ will allow in practice.
There was a subtle change in tone from Fed chair, Jerome Powell, whose message was slightly more dovish than previous meetings. Although Powell left the possibility of another interest rate hike on the table the appetite for an additional increase seems to be diminishing, alongside the tightening of financial conditions delivered through the trend of rising longer term bond yields over the last few months. In very basic terms, it seems like the monetary policy discussion for both the BoE and the Fed has shifted from ‘we might not be done hiking yet’ to ‘we aren’t considering cutting yet’. This subtle tone shift sent equity and bond markets higher during the second half of the week following the meetings. The irony of this move being that lower bond yields and higher equity markets represents a loosening of conditions which in turn drives central banks back towards more hawkish policies.
What is notable is that in the last couple of months there have been more instances of global central banks reducing interest rates than raising them, marking a shift from the trend of the past few years. This has fed the narrative that we are at a turning point in the interest rate cycle. In our view it is optimistic for investors to be speculating about rate cuts.
Cooling labour market and weaker than expected industry data could indicate that rate hikes are starting to bite
Surveys: The Conference Board Consumer Confidence Index came hotter than expected at 102.6 in October. Although beating consensus expectations the direction of travel is still negative as the prior reading for September was revised to 104.3.
Employment: Data last week evidenced some cooling of the labour market. Initial jobless claims and continuing claims ticked up for the week ending 28 October. Job openings for September beat consensus but still declined slightly from the prior reading. The ADP employment report – sometimes known as establishment (rather than household) survey employment – for October was weaker than expected showing that 113k jobs were added vs. the 150k expected. Nonfarm payrolls came in significantly weaker than expected.
Industry: The story told by the preliminary ISM data last week – which painted a positive picture for the manufacturing industries – revered this week as the final figures were released. The final data released this week showed that the US manufacturing sector sank further into contraction from an index value of 49 to 46.7.
Surprise stability in house prices mixed with poor manufacturing data
Housing: Mortgage approvals fell in October from 45.4k to 43.3k. House prices, as measured by the Nationwide House Price Index, came in considerably hotter than expected showing a rise of 0.9% month-on-month. This was the biggest monthly rise in over a year and beat the consensus expectations for a decline of 0.4%. On a year-on-year basis house prices have fallen 3.3%.
Industry: the CIPS S&P Global UK Manufacturing Index came in lower-than-expected last week and fell further into contraction at 44.8. This was the third consecutive month of contraction.
Eurozone economy shrinks in the third quarter
Inflation: Inflation across the eurozone has been falling faster than expected recently. The preliminary inflation data for October released last week corroborated this trend. Preliminary measurements for eurozone inflation in October came in at 2.9% falling from 4.3% in September. In Germany, year-on-year Consumer Price Index (CPI) came in at 3.8%, falling from 4.5% in the prior reading. In France, CPI was measured at 4.0% which fell from 4.9% in the prior reading.
GDP: The euro area GDP fell 0.1% in the third quarter. The eurozone experienced a modest contraction due to the combined pressures of rising interest rates, weakened external demand, and the lingering effects of the energy price shock. However, it’s important to note that the economy has not reached a point of severe decline.
Sluggish demand in China
China: Manufacturing Purchasing Managers’ Index (PMI) for October dipped below the expansion threshold to 49.5, following a brief rise into expansion territory in September when it stood at 50.2. This reading was below the consensus forecast of 50.2. Similarly, the non-manufacturing PMI decreased to 50.6 after an unexpected increase to 51.7 in September. This figure was the consensus forecast of 52.0. This data is indicative of the sluggish demand in China.
Japan: Preliminary industrial production numbers for September came in weaker than expected at 0.2% month-on-month. Although significantly below the consensus of 2.5%, it is still a resurgence from an August reading of -0.7%
Gold falls after four consecutive weeks of strong price action.
For the first week in four gold dropped having recently surpassed the US$2000 mark. Gold fell from US$2006 at the start of the week, just holding on above US$2000, finishing the week at US$1992.65. For the second consecutive week oil fell. Brent finished the week at US$84.89bbl and WTI at US$80.51bbl down 6.2% and 5.9% respectively.