The numbers for the week – 9 Oct 23

The numbers for the week – 9 Oct 23

Markets last week

Many movements in the markets were exacerbated last week. Government bond yields continued rising to ever higher levels, in particular in the US, oil prices slumped, and equities fell further almost everywhere. A major reversal in oil prices, mostly driven by inventories, dragged crude below US$85bbl, not just on the US gauge (West Texas Intermediate (WTI)) but also on the global gauge (Brent), which lost more than WTI last week.

Bond yields in many countries kept increasing, with US treasury yields rising the most among the main markets, but yields soared even more in Canada, Italy, Sweden, Australia, New Zealand, and various emerging markets. There was volatility in currencies, as the Japanese yen moved up and down in reaction to rumours of the Japanese authorities working to stop the currency’s slide, although no comment was forthcoming from the Bank of Japan (BoJ) or the Japanese Ministry of Finance. 10-year Japanese Government Bond yields nevertheless surged to 0.80%, higher than the BoJ’s expected control of the 10-year yield level.

A surprisingly strong showing for US employment (with higher job openings, subdued jobless claims and soaring non-farm payrolls) helped sentiment recover from worries about the US economy slowing down, which was indicated by many surveys.

The US dollar took a breather from its recent strength. Sterling recovered, as the services survey was significantly upgraded to show less weakness. Although other countries had upward revisions in their services purchasing manager index (PMI), the UK revision was much larger.

Chinese markets were closed for the Golden Week holiday. The recent attack on Israel did not affect markets last week but seems to be largely impacting oil prices for the time being, which is to be expected.

At the end of the week, US government bond yields surged over 20 bps, with gilts not far behind. Equities had another difficult week, interrupted by a better mood in the US on Friday due to the strong employment report. The American market was in fact the only one to escape red ink, whilst Asia and UK small companies were racking up losses. Interestingly, equity sectors went in the opposite direction to the movements so far for the second half of this year, with energy collapsing due to the fall in the commodity prices (Brent oil was down more than 11%), and technology recovering sharply. In contrast to recent moves in markets, UK investors did worse than global ones as sterling strengthened.

The week ahead

Wednesday: minutes of the Fed meeting

Our thoughts: is the US Federal Reserve (Fed) fast running out of opportunities to move the markets? The minutes of the September meeting will guide investors through the last two meetings of the year, where they are mostly ambivalent as to whether the Fed will hike again for the last time. Futures, however, are still projecting significant cuts in the Fed Funds rate next year (85 bps) and this is where they disagree with the public discourse from Fed officials. Will the minutes settle this debate? Probably not, but it will be interesting to see whether any minds are changed as a result.

Thursday: US CPI (with PPI the day before)

Our thoughts: the US consumer price index (CPI) is always awaited with impatience, despite the fact that the Fed does not use it as its inflation gauge. The details are as important as the headline and core readings, with investors trying to figure out whether rents are yet to fall, energy is maintaining its drag on inflation and, mostly, whether services ex shelter are finally showing a downward trend. Of course, the CPI also has a headline effect for the economy as a whole and for US consumers. With an election in a year and US voters upset about inflation, and particularly auto fuel prices, the CPI will mean more to them than to markets. The producer price index (PPI), published the day before, should also matter if it indicates a direction ahead and any help for future consumer prices.

Thursday: China CPI and PPI

Our thoughts: lots of data are coming out of China this week: inflation, trade, and credit. It’s almost too difficult to choose, but inflation matters for China too. The CPI may be an indication of how the consumer is faring after a disappointing year and the PPI will help understand export price pressure to the rest of the world. So far, the CPI is close to 0% and the PPI is heavily negative. Will that picture change at all, and what will it tell us about Chinese growth and global inflation?

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Many comments from central bank officials, none of which caused market movements

US Fed Cleveland President, Loretta Mester, said that the Fed may need to hike again this year before pausing on rates for some time. Atlanta Fed President Raphael Bostic said the Fed should be ready to keep rates high “for a long time”. “If we reduce too soon… we won’t get to 2%”. San Francisco Fed President Mary Daly said that the Fed can keep interest rates steady, as long as the jobs market and inflation stay on a downward path or financial conditions remain tight.

European Central Bank (ECB) Chief Economist Philip Lane suggested that higher ECB rates might still be needed: “price increases are still well above 2%, we are not at the inflation target yet and therefore there is still work to be done in terms of bringing inflation down.” ECB President Christine Lagarde reiterated that interest rates should be set at “sufficiently restrictive levels for as long as necessary.”

Bank of England (BoE) Governor Andrew Bailey said he expected inflation to fall to 5% or “a bit below” by year end, but after that, “we still have a way to go to bring it down” to 2%. “The job is not done”. Although inflation “is on a downward trend”, he is concerned about the record growth in pay, saying that “if it is a lagging indicator, it is lagging for longer than it has done in the past”. BoE Monetary Policy Committee member, Catherine Mann, delivered a hawkish speech where she predicted permanently higher interest rates, calling on her colleagues to “err on the side of tightening further.” She said the BoE was facing a “world where inflation shocks are likely to be more frequent”. BoE Deputy Governor Ben Broadbent warned: “there are now reasonably clear signs that monetary policy tightening is having some effect, not least in the shape of demand in the UK. Even in aggregate, we’ve seen weaker demand growth and the beginnings at least of some rise in unemployment.”

The Bank of Japan (BoJ) did not confirm whether it intervened in the Japanese yen currency, which bounced back from the ¥150 = US$1 level last week, despite speculation that the BoJ had bought yen.

United States

Surprise strength in jobs market goes against weaker surveys and consumer credit

Employment: the Job Openings and Labour Turnover Survey revealed that job openings were much higher than expected, at 9,610K vs. 8,920K the prior month, breaking a downward trend from 12,000K in March 2022, with a great share of the monthly increase coming from professional and business services. The quits rate remained at 2.3%, which is still the lowest percentage since the beginning of 2021. The Challenger, Gray & Christmas job cuts series was up 58.2% (vs. +266.9% the prior month). A lower percentage means fewer job cuts.

Jobless claims were still quite low, with weekly initial claims at 207K vs. 205K the previous week, and continuing claims at 1664K vs. 1665K.

Non-farm payrolls had a banner month, growing by 336K, way above estimates, with positive revisions of 119K for the two previous months, driven by services employment. Education, health care and government provided the bulk of the additional positions. The unemployment rate (U-3) remained at 3.8%, with an unchanged labour participation rate at 62.8% and the underemployment rate (U-6) eased from 7.1% to 7.0%. Average hourly earnings fell from 4.3% year-on-year to 4.2%.

Industry: the Ward series for total vehicle sales climbed from 15.04 million (annualised) to 15.67 million in September. Factory orders in August rose a strong 1.2%, after -2.1% the previous month, with factory orders ex transportation up 1.4%, from 0.9%.

Housing: Mortgage Bankers Association mortgage applications fell 6.0% for the week ended 29 September, a multi-decade low, after -1.3% the prior week. According to the MBA, the 30-year fixed-rate mortgage loan rose to 7.53% the same week.

Surveys: the Institute for Supply Management services index was lower at 53.6 vs. 54.5 the prior month, driven by a drop in new orders, to 51.8 from 57.5, a fall in employment from 54.7 to 53.4, a better business activity from 57.3 to 58.8 and unchanged services prices paid at a high 58.9. The S&P Global manufacturing PMI was upgraded from 48.9 to 49.8.

Trade: the US trade balance improved from a deficit of US$64.7bn to US$58.3bn.

Credit: consumer credit fell sharply in August, from +US$10.989bn to -US$15.62bn.

United Kingdom

Good news on shop prices does not extend to inflation expectations amid weaker data

Inflation: the British Retail Consortium shop price index fell sharply from 6.9% to 6.2%, driven by food prices. The Decision Maker Panel survey CPI for one year rose from 4.8% to 4.9%, whereas the DMP three-month output price expectations fell from 5.0% to 4.8%.

Surveys: the S&P Global/CIPS services PMI was significantly upgraded, from 47.2 to 49.3. Conversely, the S&P Global/CIPS construction PMI slumped from 50.8 to 45.0, indicating contraction.

Industry: new car registrations fell in September, from 24.4% year-on-year growth to 21.0%.

Property: the average price of a home in the UK fell 0.4% in September from the prior month to £278,600.


Few statistics, mostly negative

Consumer: eurozone retail sales for August fell 1.2%, for a -2.1% year-on-year drop, down from -1.0% the prior month.

Inflation: the eurozone PPI fell further from -7.6% to -11.5%.

Industry: German factory orders rebounded 3.9% in August, after -11.3% the previous month. German industrial production fell for the fourth month running, by 0.2%.


Not much from China. Japan still doing well

China: the top 100 property developers in China saw their contracted sales down 27% year-on-year in September, a moderate recovery from the -34% in August. Foreign exchange reserves fell from US$3,160bn to US$3,115bn.

Japan: the Leading Index Composite Index was a little better, at 109.5 vs. 108.2, and the coincident index at 114.3 vs. 114.2.

The monetary base rose significantly from 1.2% year-on-year to 5.6%.

Labour cash earnings were unchanged at +1.1% year-on-year, but real labour cash earnings (after inflation) remained challenged at -2.5%, and household spending was down -2.5% year-on-year, better than the previous month at -5.0%.

Oil/Commodities/Emerging Markets

Major oil price drop before the recent attacks on Israel

After a very strong run this year the WTI and Brent crude gauges fell sharply as a reaction to higher bond yields reflecting weaker economic activity. An increase in inventories at the Cushing, Oklahoma, and central oil hub also hit prices. At the end of the week, Brent was down in double digits more than WTI. Other commodities also took a breather, with copper also suffering from higher inventories, despite the softer US dollar in the last few days of the week.

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