US Treasuries got hammered again last week as yields continue to push higher across the curve, supported by on-going solid U.S. economic data. The yield on the 10y UST has now risen more than 60bps in less than two months, closing last week to yield 4.25%. Recent yield increases have pushed total returns on long-duration US Treasury bonds into the red for the year.
Global equities were mostly weaker across the board, although Chinese stocks registered gains last week. Even though stocks gained ground in China, there remain plenty of investors questioning whether or not the government has put forth a sufficiently comprehensive plan to stimulate economic growth. Moreover, the proof remains in the pudding – stating a plan and implementing it successfully are two separate things.
Stateside, an early morning rally on Friday seemed to fizzle as the day wore on leaving US stocks lower on the week. The exception was the NASDAQ, which eked out a small gain driven by renewed strength in tech shares. The tech sector got a boost from Tesla’s favourable mid-week earnings announcement, setting the stage for five more of the infamous Mag 7 companies to report earnings this coming week.
The U.S. Dollar continues to re-strengthen, edging higher 0.8% WoW, and 3.8% in the last month. I never found myself in the Dollar bear camp because U.S. economic metrics are so superior to those in the U.K. (Sterling) and the Eurozone (Euro). Moreover, it is increasingly clear that the Fed will feel pressure to moderate its easing while the ECB – and increasingly the Bank of England – have reasons to bring forward their easing to provide support to their more fragile economies.
The main things to watch this coming week are jobs data (Oct) and PCE (Sept) in the U.S., 3Q24 GDP in the U.S., the U.K. and the Eurozone, and a Bank of Japan monetary policy meeting mid-week. The BoJ meeting should be particularly interesting since the Yen has weakened back below ¥150/US$1.00, and the Japanese stock market is losing steam too, down 2.7% WoW.
WHAT MATTERED LAST WEEK
Tesla’s earnings: TSLA’s release of its 3Q2024 earnings on Wednesday kicked off Mag 7 earnings, with the company delivering much better results than expected across the board. The company’s earnings presentation to investors is here. Management also provided an optimistic outlook. The stock shot up 22% during Thursday’s session, and held onto gains on Friday to close the week at $269.19/share. This sets the stage for five other Mag 7 companies to release their earnings this coming week, along with another 164 S&P 500 companies. You can find weekly updates on S&P 500 earnings at #FactSet (“Earnings Insight”) or #LSEG I/B/E/S (“This Week in Earnings”).
US existing home sales: According to the National Association of Realtors, existing home sales were lower in September by 1.0% MoM and 3.5% YoY, suggesting that the stagnant market for existing home sales in the US is continuing. Although volumes remain weak, the prices of existing home sales have increased 3.0% in the past year.
UK and US consumer confidence: UK consumer confidence fell in October for the first time since July, as consumers pull in their horns ahead of the October 30th budget. With disappointing PMI data for October and lower-than-expected CPI in September, the odds are quickly increasing that the Bank of England will reduce its policy rate at its next monetary policy meeting (in two weeks). In contrast, US consumer confidence rose in October for the third month running according to the Michigan Consumer Confidence Survey, one more data point supporting a strong US economy.
PMI data for the US, UK and Eurozone: Preliminary PMI data for October for the Eurozone, the UK and the US was released last week.
Eurozone PMI: composite PMI came in slightly better than expected, but is still at a contractionary level of below 50 (49.7). This is the second month in a row that the Eurozone economy has stagnated.
UK PMI: composite PMI data came in lower than expected, as did manufacturing and services PMI. The composite PMI read of 51.7 was the lowest in 11 months, although the UK economy – unlike the Eurozone – remains in expansionary territory. It appears the pending Labour budget to be released October 30, along with uncertainty over the US election, has caused businesses to pause their investment plans.
US PMI: composite PMI was better than expected and remains solid at 54.3 (vs 54.0 expected), and also improved from September. Both services and manufacturing PMI were better than expected, too, although manufacturing PMI remains in contractionary territory. The US economy continues to be strong, in spite of the rhetoric in this election cycle suggesting to the contrary.
MARKETS LAST WEEK
Global equities were in the red aside from Chinese stocks, which remain volatile but were up on the week. US stocks slumped, with blue chip and small cap names suffering the most. TSLA’s earnings inspired gains in the tech sector leading to a small WoW gain for the NASDAQ.
Following a week of stability, US Treasury yields were lower again across the curve last week as various economic data releases continue to suggest that the US economy remains on solid footing. As a result, the pain for investors that are long duration is increasing.
Corporate credit all-in yields pushed higher as underlying UST yields increased. Credit spreads were also a few basis points higher in both investment grade and high yield.
In currencies last week, the U.S. Dollar was stronger, and the Yen was weaker, representing a return to the past. Gold hit another record high early in the week, and held onto gains (1.0% WoW, +32.9% YtD) as the precious metal continues to be a bright spot this year for investors. The price of oil was stronger this week, and might surge further following Israeli strikes on Iran this weekend. The situation in the Middle East remains highly unpredictable and could swing risk markets violently depending on what happens next.
MY TRADES LAST WEEK
I sold shares again last week ahead of the October 30th budget in the UK with capital gains taxes set to increase. The sales early in the week included shares of AAPL, AMZN, GOOG and MSFT, all of which are low basis shares for me. It wasn’t all one directional travel though, as I added to PG and V, reflecting a continued shift in my portfolio risk profile to lighten tech exposure at these rich levels, although I remain heavily skewed towards tech.
WHAT’S AHEAD
Economic data this coming week in the US includes October employment data (JOLTS report on Thursday and October payrolls report on Friday), as well as September PCE, the Fed’s preferred measure of inflation (expecting of 0.2% MoM for core CPI). Unemployment is expected to be flat in October at 4.1%. Preliminary 3Q2024 GDP will also be released, and is expected to be 3.0% YoY. In the Eurozone and UK, we also get preliminary 3Q2024 GDP. September unemployment figures and preliminary CPI for October will be released mid-week for the Eurozone.
Earnings: 169 additional S&P 500 companies will report earnings next week, including five of the Mag 7 companies AAPL, AMZN, META, MSFT and GOOG. NVDA, which has a quarter ending Oct 31 (rather than Sept 30), reports its earnings on Nov 20. Other companies worth watching this week include F, WM, MCD, CMG, V, CAT, LLY, EL, MA, UBER and INTC.
Monetary policy meetings:
Bank of Japan: Oct 30/31 and Dec 18/19
FOMC: Nov 6/7 and Dec 17/18
Bank of England: Nov 7 and Dec 19
ECB: Dec 12
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