Weekly Markets Review
Summary
- US equities were relatively stable, European markets ended the week in negative territory, while Chinese equities took some well needed respite as markets closed for a national holiday (China National Day)
- Yields drifted higher following better economic data in the US, hitting close to 4% at the end of the week, which caused gold to drift back.
- Oil prices spiked due to the ongoing conflict in the Middle East, with Brent crude ending north of $78 per barrel
- US employment data pointed to a resilient economy, with the strongest figures in six months, as non-farm payrolls hit 254k
- Eurozone inflation data dipped below the European Central Bank’s target, with expectations of another rate cut forthcoming
- Japan’s newly elected Prime Minister, Shigeru Ishiba, directed his cabinet to draw up stimulus packages and pledged to defeat deflation
- The week ahead: German industrial production, US Consumer Price Index (CPI) and Producer Price Index (PPI), are key events to watch.
The week ahead:
Tuesday: German industrial production
Our thoughts: Industrial production is a key measure of Europe’s largest economy, and a litmus test for global trade. It has been unexpectedly weak for much of this year, but the consensus is for a marginal positive gain of 0.8%, versus last month’s negative 2.4%.
Thursday: US CPI
Our thoughts: Consensus forecasts are for a continued reduction in the headline rate, from 2.5% last month, to 2.3% for this month. Conversely, core CPI, which excludes food and energy prices, is expected to remain at the same level of 3.2%.
Friday: US PPI
Our thoughts: The Producer Price Index measures the change in the prices paid to US producers of goods and services (wholesale inflation). The index is widely expected to notch lower to 1.6%, from 1.7% last month.
Markets last week
US
The US economy showcased vital levels of resilience through several key data points. Non-farm payrolls increased by 254k in September, versus 140k expected. The unemployment rate fell to 4.1%, which economists anticipated would hold at 4.2%, and average earnings crept up 0.4%, which is 4% year on year. September’s ISM Services Index came in at 54.9 (the highest since February 2023), and the New Orders Index expanded to 59.4.
This enhanced economic environment was recognised by the Federal Reserve’s Chair Jerome Powell last week, as he countered traders’ anticipations of an additional half-percentage-point rate cut in November. He stated, “This is not a committee that feels like it is in a hurry to cut rates quickly.” Irrespective, the market staged a rally towards the end of the week, led by cyclical sectors such as financials and energy, which are generally more positively correlated to rising yields.
Analysts also pointed out that equity market breadth had increased significantly over the last quarter, with more than 60% of stocks outperforming the S&P 500 index, compared to around 25% in the previous quarter.
Europe
The big news from the Eurozone was inflation falling below target to 1.8%, as anticipated, and the lowest level since April 2021. Importantly, core inflation remains elevated at 2.7%. The UK also grabbed headlines by producing the lowest level of manufacturing confidence since March 2020, while house prices rose on the back of lower mortgage rates, and at the fastest rate in three years.
Most major European equity markets (including the FTSE, DAX and CAC) generally drifted lower as the week progressed, with some buoyancy provided by US economic data on Friday.
Japan
Prime Minister Ishiba emphasised the need to develop a stimulus package during Friday’s cabinet meeting. The key areas of focus include providing relief from inflation (such as payments to low-income households), offering corporate subsidies to support further wage increases, and implementing measures for natural disaster preparedness.
Bonds and commodities
The US 10-year yield approached 4% on Friday, as job market data came in much stronger than expected. Analysts also suggested that the bond market is priming itself for fewer and shallower rate cuts as a result, going forward.
UK government bonds were on track for their largest daily decline in three months on Wednesday, just as European bonds retraced the significant gains seen the day before. Investors turned their attention to the likelihood of increased debt issuance ahead of the upcoming UK budget.
Oil prices surged during the week, as tensions escalated in the Middle East, with news of supply chain disruption emerging. Brent crude surpassed $78 per barrel on Friday.
